The Role of Conditioning Information in Deducing Testable Restrictions Implied by Dynamic Asset Pricing Models

TLDR

The paper investigates how conditioning information shapes testable implications of equilibrium asset pricing models, examining the impact of omitted information on the mean‑variance frontier and deriving extensions to equilibrium pricing functions. The authors derive a general representation of asset prices that incorporates conditioning information and use it to analyze restrictions on unconditional moments of payoffs and prices, including the effects of information omission.

Abstract

The purpose of this paper is to investigate testable implications of equilibrium asset pricing models. We derive a general representation for asset prices that displays the role of conditioning information. This representation is then used to examine restrictions implied by asset pricing models on the unconditional moments of asset payoffs and prices. In particular, we analyze the effect of information omission on the mean-variance frontier of one-period returns on portfolios of securities. Also, we deduce an information extension of equilibrium pricing functions that is useful in deriving restrictions on the unconditional moments of payoffs and prices.