Robust Inference for Consumption-Based Asset Pricing

84 Pages Posted: 3 Jun 2019

See all articles by Frank R. Kleibergen

Frank R. Kleibergen

University of Amsterdam - Department of Quantitative Economics (KE)

Zhaoguo Zhan

Kennesaw State University

Date Written: April 16, 2019

Abstract

The reliability of traditional asset pricing tests depends on: (1) correlations between asset returns and factors; (2) the time-series sample size T compared to the number of assets N. For macro-risk factors, like consumption growth, (1)-(2) are often such that traditional tests cannot be trusted. We extend the Gibbons-Ross-Shanken statistic to test identification of risk premia and construct their 95% confidence sets. These sets are wide or unbounded when T and N are close, yet they show that average returns are not fully spanned by betas when T exceeds N considerably. Our findings indicate when meaningful empirical inference is feasible.

JEL Classification: G12

Suggested Citation

Kleibergen, Frank R. and Zhan, Zhaoguo, Robust Inference for Consumption-Based Asset Pricing (April 16, 2019). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3387882 or http://dx.doi.org/10.2139/ssrn.3387882

Frank R. Kleibergen (Contact Author)

University of Amsterdam - Department of Quantitative Economics (KE) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Zhaoguo Zhan

Kennesaw State University ( email )

1000 Chastain Rd
Kennesaw, GA 30144
United States

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