Tests of Asset Pricing Models with A Large Number of Assets

55 Pages Posted: 22 Mar 2018 Last revised: 20 Jul 2021

See all articles by Ai He

Ai He

University of South Carolina - Darla Moore School of Business

Dashan Huang

Singapore Management University - Lee Kong Chian School of Business

Ming Yuan

Columbia University

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School

Date Written: February 28, 2020

Abstract

We propose both statistical and economic asset pricing tests that extend the well-known Gibbons, Ross, and Shanken (1989) test to allow for many assets whose dimensionality exceeds sample size. Empirically, we find that the tests reject six well-known asset pricing models at the stock level. In particular, the economic test provides a real time profitable trading strategy that exploits mispricing, and the mispricing patterns are similar across all the models. The significant profitability is unexplained by limits-to-arbitrage, prospect theory, and expectation extrapolation, suggesting that new factors are needed to better understand the cross section of stock returns.

Keywords: Pricing error, GRS

JEL Classification: C53, G11, G12, G17

Suggested Citation

He, Ai and Huang, Dashan and Yuan, Ming and Zhou, Guofu, Tests of Asset Pricing Models with A Large Number of Assets (February 28, 2020). Available at SSRN: https://ssrn.com/abstract=3143752 or http://dx.doi.org/10.2139/ssrn.3143752

Ai He

University of South Carolina - Darla Moore School of Business ( email )

1014 Greene Street
Columbia, SC 29208
United States

HOME PAGE: http://www.aihefinance.com/

Dashan Huang

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore

HOME PAGE: http://dashanhuang.weebly.com/

Ming Yuan

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Guofu Zhou (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

Washington University
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6384 (Phone)
314-658-6359 (Fax)

HOME PAGE: http://apps.olin.wustl.edu/faculty/zhou/

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