 A General Randomized Test for AlphaDaniele Massacci, Lucio Sarno, Lorenzo Trapani and Pierluigi Vallarino No 21904, CEPR Discussion Papers from Centre for Economic Policy Research Abstract: We propose a methodology to test for the null hypothesis that the alphas of a panel of asset returns are jointly equal to zero in a linear factor pricing model with observable and tradable factors — that is, the null of “zero alpha†. The test is based on equation-by- equation estimation, using a randomized version of the estimated alphas, which only requires rates of convergence. The distinct features of the proposed methodology are that it does not require the estimation of any covariance matrix, and that it allows for both N and T to pass to infinity, with the former possibly faster than the latter. Further, unlike extant approaches, the procedure can accommodate conditional heteroskedasticity, non-Gaussianity, and strong cross-sectional dependence in the error terms. We also propose a derandomized decision rule to choose in favor or against the correct specification of a linear factor pricing model. Monte Carlo simulations show that the test has satisfactory properties and it compares favorably to several existing tests. The usefulness of the testing procedure is illustrated through an application of linear factor pricing models to the constituents of the S&P 500. Date: 2026-09 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:21904 Ordering information: This working paper can be ordered from Access Statistics for this paper More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK. |
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