Two main approaches are commonly used to empirically evaluate linear factor pricing
models: regression and SDF methods, with centred and uncentred versions of the latter.
We show that unlike standard two-step or iterated GMM procedures, single-step estimators
such as continuously updated GMM yield numerically identical values for prices of risk,
pricing errors, Jensen s alphas and overidentifying restrictions tests irrespective of the model
validity. Therefore, there is arguably a single approach ...
Two main approaches are commonly used to empirically evaluate linear factor pricing
models: regression and SDF methods, with centred and uncentred versions of the latter.
We show that unlike standard two-step or iterated GMM procedures, single-step estimators
such as continuously updated GMM yield numerically identical values for prices of risk,
pricing errors, Jensen s alphas and overidentifying restrictions tests irrespective of the model
validity. Therefore, there is arguably a single approach regardless of the factors being traded
or not, or the use of excess or gross returns. We illustrate our results by revisiting Lustig
and Verdelhan s (2007) empirical analysis of currency returns.
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