Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/60554
Authors: 
Wang, Zhenyu
Zhang, Xiaoyan
Year of Publication: 
2006
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 265
Abstract: 
Hansen and Jagannathan (1997) have developed two measures of pricing errors for asset pricing models: the maximum pricing error in all static portfolios of the test assets and the maximum pricing error in all contingent claims of the assets. In this paper, we develop simulation-based Bayesian inference for these measures. While the literature reports that the time-varying extensions substantially reduce pricing errors of classic models on the standard test assets, our analysis shows that the reduction is much smaller based on the second measure. Those time-varying models have pricing errors on the contingent claims of the test assets because their stochastic discount factors are often negative and admit arbitrage opportunities.
Subjects: 
Bayesian inference, asset pricing, pricing errors, model comparison, contingent claims
JEL: 
G1
G12
Document Type: 
Working Paper

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