A Large-Scale Approach for Evaluating Asset Pricing Models

49 Pages Posted: 12 Jun 2012 Last revised: 21 Oct 2018

See all articles by Laurent Barras

Laurent Barras

McGill University - Desautels Faculty of Management

Date Written: March 24, 2018

Abstract

Recent studies show that the standard test portfolios do not contain sufficient information to discriminate between asset pricing models. To address this issue, we develop a large-scale approach that expands the cross-section to several thousand portfolios. Our novel approach is simple, widely applicable, and allows for formal evaluation/comparison tests. Its benefits are confirmed in empirical tests of CAPM- and characteristic-based models. While these models are all misspecified, we uncover striking performance differences between them. In particular, the human capital and conditional CAPMs largely outperform the CAPM which suggests that labor income and time-varying recession risks are primary concerns for investors.

Keywords: Asset Pricing, Model Comparison, Large Cross-Section

JEL Classification: G12

Suggested Citation

Barras, Laurent, A Large-Scale Approach for Evaluating Asset Pricing Models (March 24, 2018). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2081913 or http://dx.doi.org/10.2139/ssrn.2081913

Laurent Barras (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada
+15143988862 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
460
Abstract Views
1,575
rank
61,453
PlumX Metrics