Misspecification-Robust Inference in Linear Asset-Pricing Models with Irrelevant Risk Factors

Nikolay Gospodinov, Raymond Kan and Cesare Robotti

The Review of Financial Studies, 2014, vol. 27, issue 7, 2139-2170

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.

Date: 2014
References: Add references at CitEc
Citations: View citations in EconPapers (54)

Downloads: (external link)
http://hdl.handle.net/10.1093/rfs/hht135 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Misspecification-robust inference in linear asset pricing models with irrelevant risk factors (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:rfinst:v:27:y:2014:i:7:p:2139-2170.

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

The Review of Financial Studies is currently edited by Itay Goldstein

More articles in The Review of Financial Studies from Society for Financial Studies Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().