Testing Asset Pricing Models on Individual Stocks

66 Pages Posted: 17 Mar 2021 Last revised: 14 Nov 2023

See all articles by Charles Clarke

Charles Clarke

University of Kentucky - Finance

Morteza Momeni Shahraki

University of Kentucky - Finance

Date Written: January 3, 2023

Abstract

This paper tests asset pricing models using individual stocks as test assets, rather than sorted portfolios. Sorted portfolios have the severe limitation that the researcher must know, in advance, reliable predictors of expected returns. We show how to generate appropriately sized tests and verify that our tests have considerable test power. We apply our tests to seven leading factor models. We reject six of the seven leading models we test. The instrumented factor model of Kelly, Pruitt, and Su stands out as the most successful. We show a natural extension of our approach incorporates characteristic driven time-variation in factor loadings.

Keywords: Empirical Asset Pricing

JEL Classification: G12, C15

Suggested Citation

Clarke, Charles and Momeni Shahraki, Morteza, Testing Asset Pricing Models on Individual Stocks (January 3, 2023). Available at SSRN: https://ssrn.com/abstract=3805109 or http://dx.doi.org/10.2139/ssrn.3805109

Charles Clarke (Contact Author)

University of Kentucky - Finance ( email )

Gatton School of Business and Economics
Department of Finance and Quantitative Methods
Lexington, KY 40506
United States
214-886-7675 (Phone)

HOME PAGE: http://https://sites.google.com/site/charlievclarke/

Morteza Momeni Shahraki

University of Kentucky - Finance ( email )

Lexington, KY 40506
United States

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