Misspecification-robust inference in linear asset pricing models with irrelevant risk factors

Nikolay Gospodinov, Raymond Kan and Cesare Robotti ()

No 2013-09, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

Abstract: We show that in misspecified models with useless factors (for example, factors that are independent of the returns on the test assets), the standard inference procedures tend to erroneously conclude, with high probability, that these irrelevant factors are priced and the restrictions of the model hold. Our proposed model selection procedure, which is robust to useless factors 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. The practical relevance of our analysis is illustrated using simulations and empirical applications.

Keywords: asset pricing models; lack of identification; model misspecification; GMM estimation (search for similar items in EconPapers)
JEL-codes: C12 C52 G12 (search for similar items in EconPapers)
Pages: 87 pages
Date: 2013-10-01
New Economics Papers: this item is included in nep-ecm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Downloads: (external link)
http://www.frbatlanta.org/documents/pubs/wp/wp1309.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.frbatlanta.org/documents/pubs/wp/wp1309.pdf [301 Moved Permanently]--> https://www.frbatlanta.org/documents/pubs/wp/wp1309.pdf [301 Moved Permanently]--> https://www.atlantafed.org/documents/pubs/wp/wp1309.pdf)

Related works:
Journal Article: Misspecification-Robust Inference in Linear Asset-Pricing Models with Irrelevant Risk Factors (2014)
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:fip:fedawp:2013-09

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta Contact information at EDIRC.
Bibliographic data for series maintained by Rob Sarwark ().