Testing and Ranking of Asset Pricing Models Using the GRS Statistic

Mark J. Kamstra () and Ruoyao Shi
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Mark J. Kamstra: Schulich School of Business, Room N204-C, York University, 4700 Keele St., Toronto, ON M3J 1P3, Canada
Ruoyao Shi: Department of Economics, University of California Riverside, 900 University Avenue, Riverside, CA 92521, USA

JRFM, 2024, vol. 17, issue 4, 1-25

Abstract: We clear up an ambiguity in the statement of the GRS statistic by providing the correct formula of the GRS statistic and the first proof of its F-distribution in the general multiple-factor case. Casual generalization of the Sharpe-ratio-based interpretation of the single-factor GRS statistic to the multiple-portfolio case makes experts in asset pricing studies susceptible to an incorrect formula. We illustrate the consequences of using the incorrect formulas that the ambiguity in GRS leads to—over-rejecting and misranking asset pricing models. In addition, we suggest a new approach to ranking models using the GRS statistic p -value.

Keywords: GRS; asset pricing; CAPM; multivariate test; portfolio efficiency; Sharpe ratio; over-rejection; model ranking (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
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