Evaluation of linear asset pricing models by implied portfolio performance

We present a theoretical perspective that motivates the use of the Generalized Least Squares R-Square, prominently advocated by Lewellen et al. [Lewellen, J., Nagel, S., Shanken, J., forthcoming. A skeptical appraisal of asset-pricing tests. Journal of Financial Economics], as an evaluation measure for multivariate linear asset pricing models. Adapting results from Shanken [Shanken, J., 1985. Multivariate tests of the zero-beta CAPM. Journal of …