Portfolio formations can affect asset pricing tests

Ingrid Lo

Journal of Asset Management, 2004, vol. 5, issue 3, No 6, 203-216

Abstract: Abstract This paper investigates the issues of portfolio formation and asset pricing tests. Since much empirical work in finance starts with grouping individual stocks into portfolios based on a particular attribute of the stocks, this paper examines the effect of this practice and whether using individual stocks solves the problem of grouping. Canadian stock return data are used. Three asset pricing tests, the multivariate F test, the average F test and a robust specification test by Hansen and Jagannathan (Journal of Finance, 52(2), 557–90, 1997) are considered. It is found that (i) grouping of stocks based on different attributes can give different asset pricing inference using the same pool of stocks, (ii) using individual assets introduces survivorship problems and (iii) the three asset pricing tests can give different inference on the same model specification.

Keywords: portfolio formation; asset pricing test; multivariate F test; average F test; robust specification test (search for similar items in EconPapers)
Date: 2004
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DOI: 10.1057/palgrave.jam.2240139

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