A Combined Approach to the Inference of Conditional Factor Models

Yan Li, Liangjun Su () and Yuewu Xu
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Yan Li: Department of Finance, Temple University, Philadelphia, PA 19122
Yuewu Xu: School of Business, Fordham University, New York, NY 10019

No 10-2014, Working Papers from Singapore Management University, School of Economics

Abstract: This paper develops a new methodology for estimating and testing conditional factor models in finance. We propose a two-stage procedure that naturally unifies the two existing approaches in the finance literature–the parametric approach and the nonparametric approach. Our combined approach possesses important advantages over both methods. Using our two-stage combined estimator, we derive new test statistics for investigating key hypotheses in the context of conditional factor models. Our tests can be performed on a single asset or jointly across multiple assets. We further propose a novel test to directly check whether the parametric model used in our first stage is correctly specified. Simulations indicate that our estimates and tests perform well in finite samples. In our empirical analysis, we use our new method to examine the performance of the conditional CAPM, which has generated controversial results in the recent asset-pricing literature.

Keywords: Conditional Factor Models; Specification Tests; Semiparametric Method; Nonparametric Method; Conditional CAPM. (search for similar items in EconPapers)
JEL-codes: C51 C52 G12 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2014-08
New Economics Papers: this item is included in nep-ecm and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in SMU Economics and Statistics Working Paper Series

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Related works:
Journal Article: A Combined Approach to the Inference of Conditional Factor Models (2015)
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