Which Alpha?

Francisco Barillas and Jay Shanken ()

No 21698, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A common approach to comparing asset pricing models with traded factors involves a competition between models in pricing test-asset returns. We find that such practice, while seemingly reasonable, cannot be relied on to determine which is the superior model for several widely accepted criteria including statistical likelihood, Sharpe ratios and a modified HJ distance. All that matters for model comparison is the extent to which each model is able to price the factors in the other model. Given this information, test assets are actually irrelevant, whether the models are nested or non-nested.

JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2015-11
New Economics Papers: this item is included in nep-fmk
Note: AP
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Citations: View citations in EconPapers (3)

Published as Francisco Barillas & Jay Shanken, 2017. "Which Alpha?," Review of Financial Studies, Society for Financial Studies, vol. 30(4), pages 1316-1338.

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