General Aggregation of Misspecified Asset Pricing Models

33 Pages Posted: 3 Jan 2018

Date Written: 2017-11-01

Abstract

This paper proposes an entropy-based approach for aggregating information from misspecified asset pricing models. The statistical paradigm is shifted away from parameter estimation of an optimally selected model to stochastic optimization based on a risk function of aggregation across models. The proposed method relaxes the perfect substitutability of the candidate models, which is implicitly embedded in the linear pooling procedures, and ensures that the aggregation weights are selected with a proper (Hellinger) distance measure that satisfies the triangle inequality. The empirical results illustrate the robustness and the pricing ability of the aggregation approach to stochastic discount factor models.

Keywords: entropy, model aggregation, asset pricing, misspecified models, oracle inequality, Hellinger distance

JEL Classification: C13, C52, G12

Suggested Citation

Gospodinov, Nikolay and Maasoumi, Esfandiar Essie, General Aggregation of Misspecified Asset Pricing Models (2017-11-01). FRB Atlanta Working Paper No. 2017-10. Available at SSRN: https://ssrn.com/abstract=3092151

Nikolay Gospodinov (Contact Author)

Federal Reserve Bank of Atlanta ( email )

Atlanta, GA 30309
United States

HOME PAGE: https://www.frbatlanta.org/research/economists/gospodinov-nikolay.aspx?panel=1

Esfandiar Essie Maasoumi

Emory University ( email )

1602 Fishburne Drive
Atlanta, GA 30322
United States

HOME PAGE: http://economics.emory.edu/home/people/faculty/Maasoumiesfandiar_Home.html

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