Testing Asset Pricing Model with Non-Traded Factors: A New Method to Resolve (Measurement/Econometric) Issues in Factor-Mimicking Portfolio

83 Pages Posted: 18 Mar 2019 Last revised: 19 Mar 2021

See all articles by Kuntara Pukthuanthong

Kuntara Pukthuanthong

University of Missouri, Columbia

Richard Roll

California Institute of Technology

Junbo L. Wang

Louisiana State University, Baton Rouge

Tengfei Zhang

University of Cambridge - Cambridge Judge Business School

Date Written: February 20, 2019

Abstract

We suggest the factor-mimicking portfolio (FMP) of a nontraded factor should jointly minimize the mispricing component of stock returns in a beta-pricing model. We also propose a novel method for constructing FMPs and measure the risk premiums of nontraded factors. Several of the macroeconomic factors of FMPs constructed by our method are related to the cross-sectional covariance of individual stock or bond returns. Consumption growth, inflation, and the unemployment rate command equity premiums; consumption growth and industrial production command bond premiums.

Keywords: factor-mimicking portfolios, nontraded factors, risk premium

JEL Classification: G10, G12, G11

Suggested Citation

Pukthuanthong, Kuntara and Roll, Richard W. and Wang, Junbo L. and Zhang, Tengfei, Testing Asset Pricing Model with Non-Traded Factors: A New Method to Resolve (Measurement/Econometric) Issues in Factor-Mimicking Portfolio (February 20, 2019). Available at SSRN: https://ssrn.com/abstract=3341604 or http://dx.doi.org/10.2139/ssrn.3341604

Kuntara Pukthuanthong

University of Missouri, Columbia ( email )

Robert J. Trulaske, Sr. College of Business
403 Cornell Hall
Columbia, MO 65211
United States
6198076124 (Phone)

HOME PAGE: https://www.kuntara.net/

Richard W. Roll

California Institute of Technology ( email )

1200 East California Blvd
Mail Code: 228-77
Pasadena, CA 91125
United States
626-395-3890 (Phone)
310-836-3532 (Fax)

Junbo L. Wang

Louisiana State University, Baton Rouge ( email )

Baton Rouge, LA 70803
United States

Tengfei Zhang (Contact Author)

University of Cambridge - Cambridge Judge Business School ( email )

Trumpington St.
Cambridge, CB21AG
United Kingdom

HOME PAGE: http://sites.google.com/view/tengfeizhang/home

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