Macro-Finance Decoupling: Robust Evaluations of Macro Asset Pricing Models
29 Pages Posted: 26 May 2020
Date Written: May 24, 2020
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: Suggested Citation