A new test of factor model for asset returns: based on pleiotropy model

Qing Jiang, Xingwei Tong, Peng Wu and Xun Zhang

Quantitative Finance, 2025, vol. 25, issue 1, 91-115

Abstract: The validity of factor model for asset returns relies on testing the null hypothesis of whether the intercepts are jointly indistinguishable from zero, which, however, is often rejected, resulting in imperfect comparison among competing asset pricing models. In this paper, we consider a new test based on the pleiotropy model, through which we could determine how many intercepts in the time-series regressions in portfolio-level are statistically non-zero and thus provide a more direct way to compare the validity of competing factor models. A sequential testing procedure regarding the estimated parameters under unconstrained and constrained conditions is proposed, based on some likelihood ratio test statistics. Simulation studies suggest that our proposed test statistics have better performance than the influential GRS test. Finally, we apply the proposed method to real data of portfolio returns with Fama-French five factor models, and demonstrate that it provides important and irreplaceable information for determining the efficacy of different asset pricing models.

Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/14697688.2024.2440540 (text/html)
Access to full text is restricted to subscribers.

Related works:
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:taf:quantf:v:25:y:2025:i:1:p:91-115

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RQUF20

DOI: 10.1080/14697688.2024.2440540

Access Statistics for this article

Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral

More articles in Quantitative Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().