A Large-Scale Approach for Evaluating Asset Pricing Models
88 Pages Posted: 12 Jun 2012 Last revised: 23 Jun 2022
Date Written: March 24, 2018
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: Suggested Citation