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Asset Pricing with Conditioning Information: A New Test

Authors

  • Kevin Q. Wang

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    • * This paper is based upon part of my Ph.D. dissertation at the University of Chicago. I am grateful to Yacine Ait-Sahalia, Xiaohong Chen, John Cochrane, George Constantinides, and Robert McCulloch for advice and guidance. I thank Ravi Bansal, Phelim Boyle, Michael Brandt, Tarun Chordia, Philip Dybvig, Lars Hansen, Burton Hollifield, David Hsieh, Kris Jacobs, Ravi Jagannathan, Raymond Kan, Ekaterini Kyriazidou, Kai Li, Tom McCurdy, Oyvind Norli, Ruey Tsay, Guofu Zhou, seminar participants at McGill University, University of Chicago, University of North Carolina, University of Toronto, University of Waterloo, Washington University in Saint Louis, and participants at the 1998 Northern Finance Association meetings in Toronto and the 1999 American Finance Association meetings in New York for many helpful comments and suggestions. I thank Eugene Fama and Toby Moskowitz for providing data. Comments from René Stulz (the editor) and two anonymous referees have greatly improved the paper. I also thank the Connaught Fund at the University of Toronto for research support.

Abstract

This paper presents a new test of conditional versions of the Sharpe-Lintner CAPM, the Jagannathan and Wang (1996) extension of the CAPM, and the Fama and French (1993) three-factor model. The test is based on a general nonparametric methodology that avoids functional form misspecification of betas, risk premia, and the stochastic discount factor. Our results provide a novel view of empirical performance of these models. In particular, we find that a nonparametric version of the Fama and French model performs well, even when challenged by momentum portfolios.

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