This paper evaluates the specification errors of several empirical asset pricing models that have been developed as potential improvements on the CAPM. We use the methodology of Hansen and Jagannathan (J. Finance 51 (1997) 3), and the test assets are the 25 Fama-French (J. Financial Econom. 52 (1997) 557) equity portfolios sorted on size and book-to-market ratio, and the Treasury bill. We allow the parameters of each model's pricing kernel to fluctuate with the business cycle. While we cannot reject correct pricing for Campbell's (J. Political Econom. 104 (1996) 298) model, stability tests indicate that the parameters may not be stable. A robustness test also indicates that none of the models correctly price returns that are scaled by the term premium.
Hodrick, Robert, and Xiaoyan Zhang. "Evaluating the Specification Errors of Asset Pricing Models." Journal of Financial Economics 62, no. 2 (November 2001): 327-76.
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