Adaptive Testing for Alphas in Conditional Factor Models with High Dimensional Assets

Huifang Ma, Long Feng, Zhaojun Wang and Jigang Bao

Journal of Business & Economic Statistics, 2024, vol. 42, issue 4, 1356-1366

Abstract: This article focuses on testing for the presence of alpha in time-varying factor pricing models, specifically when the number of securities N is larger than the time dimension of the return series T. We introduce a maximum-type test that performs well in scenarios where the alternative hypothesis is sparse. We establish the limit null distribution of the proposed maximum-type test statistic and demonstrate its asymptotic independence from the sum-type test statistics proposed by Ma et al. Additionally, we propose an adaptive test by combining the maximum-type test and sum-type test, and we show its advantages under various alternative hypotheses through simulation studies and two real data applications.

Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:taf:jnlbes:v:42:y:2024:i:4:p:1356-1366

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DOI: 10.1080/07350015.2024.2313543

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