Which Alpha?

28 Pages Posted: 27 May 2015 Last revised: 11 Sep 2016

See all articles by Francisco Barillas

Francisco Barillas

University of New South Wales

Jay A. Shanken

Emory University - Goizueta Business School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 9, 2016

Abstract

A common approach to comparing asset pricing models involves a competition in pricing test-asset returns. In contrast, we show that for models with traded factors, when the comparison is framed appropriately in terms of success in pricing both the test-asset and factor returns, the extent to which each model is able to price the factors in the other model is what matters for model comparison. Test assets are irrelevant based on several prominent criteria. For models with nontraded factors, test assets are relevant for model comparison insofar as they are needed to identify factor mimicking-portfolio returns.

JEL Classification: G10, G12

Suggested Citation

Barillas, Francisco and Shanken, Jay A., Which Alpha? (September 9, 2016). Available at SSRN: https://ssrn.com/abstract=2610864 or http://dx.doi.org/10.2139/ssrn.2610864

Francisco Barillas (Contact Author)

University of New South Wales ( email )

College Rd, Kensington
Sydney, 2052
Australia

Jay A. Shanken

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States
404-727-4772 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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