Approximating the Asset Pricing Kernel

JOURNAL OF FINANCE, Vol 52, No 4, September 1997

Posted: 17 Sep 1997

See all articles by David A. Chapman

David A. Chapman

McIntire School, University of Virginia

Abstract

This paper tests a simple consumption-based asset pricing model by approximating the true asset pricing kernel using low-order orthonormal polynomials based on the model's state variables. Approximated kernels based solely on next period's consumption growth are not rejected by overall measures of model fit, but they produce statistically and economically large pricing errors. Approximated kernels that are based on two quarters of future consumption growth and technology shocks have substantially improved overall fit. In particular, the best of these kernels are capable of eliminating the small firm effect.

JEL Classification: G12, M41

Suggested Citation

Chapman, David A., Approximating the Asset Pricing Kernel. JOURNAL OF FINANCE, Vol 52, No 4, September 1997, Available at SSRN: https://ssrn.com/abstract=10638

David A. Chapman (Contact Author)

McIntire School, University of Virginia ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

HOME PAGE: http://https://sites.google.com/site/davidchapmanswebsite/

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