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Spurious inference in reduced-rank asset-pricing models
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Gospodinov, Nikolay, Kan, Raymond and Robotti, Cesare (2017) Spurious inference in reduced-rank asset-pricing models. Econometrica, 85 (5). pp. 1613-1628. doi:10.3982/ECTA13750 ISSN 0012-9682.
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Official URL: https://doi.org/10.3982/ECTA13750
Abstract
We study some seemingly anomalous results that arise in possibly misspecified, reduced-rank linear asset-pricing models estimated by the continuously updated generalized method of moments. When a spurious factor (that is, a factor that is uncorrelated with the returns on the test assets) is present, the test for correct model specification has asymptotic power that is equal to the nominal size. In other words, applied researchers will erroneously conclude that the model is correctly specified even when the degree of misspecification is arbitrarily large.The rejection probability of the test for overidentifying restrictions typically decreases further in underidentified models where the dimension of the null space is larger than 1.
Item Type: | Journal Article | ||||||
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Subjects: | H Social Sciences > H Social Sciences (General) H Social Sciences > HA Statistics H Social Sciences > HB Economic Theory H Social Sciences > HG Finance |
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Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group | ||||||
Journal or Publication Title: | Econometrica | ||||||
Publisher: | Blackwell Publishing | ||||||
ISSN: | 0012-9682 | ||||||
Official Date: | 30 September 2017 | ||||||
Dates: |
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Volume: | 85 | ||||||
Number: | 5 | ||||||
Page Range: | pp. 1613-1628 | ||||||
DOI: | 10.3982/ECTA13750 | ||||||
Status: | Peer Reviewed | ||||||
Publication Status: | Published | ||||||
Access rights to Published version: | Restricted or Subscription Access | ||||||
Date of first compliant deposit: | 5 July 2018 |
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