EconPapers    
Economics at your fingertips  
 

Distance-Based Metrics: A Bayesian Solution to the Power and Extreme-Error Problems in Asset-Pricing Tests

Amit Goyal (), Zhongzhi Lawrence He and Sahn-Wook Huh
Additional contact information
Zhongzhi Lawrence He: Brock University, Goodman School of Business
Sahn-Wook Huh: State University of New York (SUNY) - Department of Finance

No 18-78, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We propose a unified set of distance-based performance metrics that address the power and extreme-error problems inherent in traditional measures for asset-pricing tests. From a Bayesian perspective, the distance metrics coherently incorporate both pricing errors and their standard errors. Measured in units of return, they have an economic interpretation as the minimum cost of holding a dogmatic belief in a model. Our metrics identify Fama and French (2015) factor model (augmented with the momentum factor and/or without the value factor) as the best model and thus highlight the importance of the momentum factor. In contrast, the traditional alpha-based statistics often lead to inconsistent and counter-intuitive model rankings.

Keywords: Asset-Pricing Tests; Power Problem; Extreme-Error Problem; Distance-Based Metrics; Optimal Transport Theory; Bayesian Interpretations; Model Comparisons and Rankings (search for similar items in EconPapers)
JEL-codes: C11 G11 G12 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2018-12
New Economics Papers: this item is included in nep-ecm and nep-ore
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3286327 (application/pdf)

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:chf:rpseri:rp1878

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().

 
Page updated 2020-02-21
Handle: RePEc:chf:rpseri:rp1878