Gospodinov, Nikolay, Kan, Raymond and Robotti, Cesare (2014) Misspecification-robust inference in linear asset pricing models with irrelevant risk factors. Review of Financial Studies, 27 (7). pp. 2139-2170. doi:10.1093/rfs/hht135

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Abstract

This paper shows that in misspecified models with risk factors that are uncorrelated with the test asset returns, the conventional inference methods tend to erroneously conclude, with high probability, that these factors are priced. Our proposed model selection procedure, which is robust to identification failure and potential model misspecification, restores the standard inference and proves to be effective in eliminating factors that do not improve the model's pricing ability. Applying our methodology to several popular asset-pricing models suggests that only the market and book-to-market factors appear to be priced, while the statistical evidence on the pricing ability of many macroeconomic factors is rather weak.

Item Type:	Journal Article
Subjects:	H Social Sciences > HG Finance
Divisions:	Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH):	Capital assets pricing model, Inference, Probabilities, Linear models (Statistics)
Journal or Publication Title:	Review of Financial Studies
Publisher:	Oxford University Press
ISSN:	0893-9454
Official Date:	1 July 2014
Dates:	Date Event 1 July 2014 Published 28 January 2014 Available 15 November 2013 Accepted
Date of first compliant deposit:	10 July 2018
Volume:	27
Number:	7
Page Range:	pp. 2139-2170
DOI:	10.1093/rfs/hht135
Status:	Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Restricted or Subscription Access
RIOXX Funder/Project Grant:	Project/Grant ID RIOXX Funder Name Funder ID UNSPECIFIED Fonds de recherche du Québec-Société et culture http://dx.doi.org/10.13039/100008240 UNSPECIFIED Institut de finance mathématique de Montréal UNSPECIFIED UNSPECIFIED Social Sciences and Humanities Research Council of Canada http://dx.doi.org/10.13039/501100000155 UNSPECIFIED National Bank Financial Group http://viaf.org/viaf/160537889

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