Empirical Asset Pricing With Many Assets and Short Time Series

34 Pages Posted: 28 Nov 2018

See all articles by Rasmus Lönn

Rasmus Lönn

Erasmus University Rotterdam (EUR) - Department of Econometrics

Peter C. Schotman

Maastricht University - Department of Finance

Date Written: October 31, 2018

Abstract

We construct tracking portfolios consisting of a large number of assets for macroeconomic factors using the L_2-boosting algorithm. We use these tracking portfolios as instruments to estimate factor risk prices. The same learning algorithm also provides the weights of a mean-variance efficient portfolio. With this additional input we compute the Hansen-Jagannathan distance to compare how alternative models fit the cross-section. We apply the method to 900 portfolio return series in the Kenneth French data library. While macro factors fail to explain most cross-sectional variation, we find that both consumption and inflation risk are priced.

Keywords: Boosting, Asset Pricing Tests, Hansen-Jagannathan Distance

JEL Classification: G12, C44, C55

Suggested Citation

Lönn, Rasmus and Schotman, Peter C., Empirical Asset Pricing With Many Assets and Short Time Series (October 31, 2018). Available at SSRN: https://ssrn.com/abstract=3278229 or http://dx.doi.org/10.2139/ssrn.3278229

Rasmus Lönn

Erasmus University Rotterdam (EUR) - Department of Econometrics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Peter C. Schotman (Contact Author)

Maastricht University - Department of Finance ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 388 3862 (Phone)
+31 43 388 4875 (Fax)

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