Macro-Finance Decoupling: Robust Evaluations of Macro Asset Pricing Models

33 Pages Posted: 26 May 2020 Last revised: 8 Nov 2021

See all articles by Xu Cheng

Xu Cheng

University of Pennsylvania - Department of Economics

Winston Wei Dou

The Wharton School, University of Pennsylvania; National Bureau of Economic Research (NBER)

Zhipeng Liao

University of California, Los Angeles (UCLA) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 25, 2021

Abstract

This paper shows that robust inference under weak identification is important to the evaluation
of many influential macro asset pricing models, including (time-varying) rare-disaster risk
models and long-run risk models. Building on recent developments in the conditional inference
literature, we provide a novel conditional specification test by simulating the critical value
conditional on a sufficient statistic. This sufficient statistic can be intuitively interpreted as
a measure capturing the macroeconomic information decoupled from the underlying content
of asset pricing theories. Macro-finance decoupling is an effective way to improve the power
of the specification test when asset pricing theories are difficult to refute because of a severe
imbalance in the information content about the key model parameters between macroeconomic
moment restrictions and asset pricing cross-equation restrictions. We apply the proposed conditional specification test to the evaluation of a time-varying rare-disaster risk model and the
construction of robust model uncertainty sets.

The supplemental appendix can be found at: https://ssrn.com/abstract=3609598.
The note on additional materials can be found at: https://ssrn.com/abstract=3787125.

Keywords: Conditional inference, Information imbalance, Long-run risk, Rare disasters, Structural asset pricing, Weak identification.

JEL Classification: C12, C32, C52, G12.

Suggested Citation

Cheng, Xu and Dou, Winston Wei and Liao, Zhipeng, Macro-Finance Decoupling: Robust Evaluations of Macro Asset Pricing Models (August 25, 2021). Econometrica, forthcoming, Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=3609627 or http://dx.doi.org/10.2139/ssrn.3609627

Xu Cheng (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

HOME PAGE: http://www.sas.upenn.edu/~xucheng/

Winston Wei Dou

The Wharton School, University of Pennsylvania ( email )

2318 Steinberg Hall - Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

HOME PAGE: http://finance-faculty.wharton.upenn.edu/wdou/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org/people/winston_wei_dou?page=1&perPage=50

Zhipeng Liao

University of California, Los Angeles (UCLA) - Department of Economics ( email )

8283 Bunche Hall
Los Angeles, CA 90095-1477
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
327
Abstract Views
1,620
Rank
83,527
PlumX Metrics