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Prof. Andrea Vedolin
Associate Professor of Finance
Boston University
Questrom School of Business

This paper develops a systematic framework for testing asset-pricing models, with a particular focus on obtaining testable restrictions on the joint distribution of multiple SDFs. Our framework takes an arbitrary set of empirical and/or theoretical restrictions—such as observable returns and Euler equations—as a primitive and returns a family of necessary conditions on the joint distribution of SDFs that have to be satisfied if the model is to be consistent with the a priori specified restrictions. Applying our main results to international asset-pricing models, we show that observed asset prices imply non-trivial restrictions on the comovement of SDFs of different countries. In a preference-free economy and for a broad set of financial market structures, we find that when agents are allowed to trade bonds and equities internationally, the relatively low exchange rate volatility implies SDF correlations that are almost perfect. Our findings highlight that the puzzling behavior of exchange rates is independent of the degree of completeness and the number of assets traded in the economy.