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

29 Pages Posted: 26 May 2020

See all articles by Xu Cheng

Xu Cheng

University of Pennsylvania - Department of Economics

Winston Dou

The Wharton School, University of Pennsylvania

Zhipeng Liao

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

Multiple version iconThere are 2 versions of this paper

Date Written: May 24, 2020

Abstract

This paper shows that robust inference under weak identification is important to the evaluation of many influential macro asset pricing models, including long-run risk models, disaster risk models, and multi-factor linear asset pricing models. Building on recent developments in the conditional inference literature, we provide a new 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 our specification test when asset pricing theories are difficult to refute due to an imbalance in the information content about the key model parameters between macroeconomic moment restrictions and asset pricing cross-equation restrictions.

The supplemental appendix can be found at: https://ssrn.com/abstract=3609598.

Keywords: Asset Pricing, Conditional Inference, Disaster Risk, Long-Run Risk, Factor Models, Specification Test, Weak Identification

JEL Classification: C12, C32, C52, G12

Suggested Citation

Cheng, Xu and Dou, Winston and Liao, Zhipeng, Macro-Finance Decoupling: Robust Evaluations of Macro Asset Pricing Models (May 24, 2020). 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 Dou

The Wharton School, University of Pennsylvania ( email )

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

Zhipeng Liao

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

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

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