Is Long Run Risk Really Priced? A Reply

15 Pages Posted: 23 Apr 2024

See all articles by Yukun Liu

Yukun Liu

University of Rochester - Simon Business School

Ben Matthies

University of Notre Dame

Date Written: April 22, 2024

Abstract

Maio (2023) implements the cross-sectional asset pricing tests of the NI-index from Liu and Matthies (2022). Maio (2023) confirms that every pricing result in Liu and Matthies (2022) replicates successfully. Next, Maio (2023) runs new tests which test the asset pricing power of the NI-index on different subsamples of portfolios and argues that the cross-sectional pricing power of the NI-index is driven exclusively by the 10 momentum test portfolios. This claim is false. If the NI-index exclusively prices the momentum portfolios, then the pricing power of the NI-index should disappear after removing all momentum portfolios from the set of test assets. Despite this being the only direct test of the central claim in Maio (2023), the results of this test are never shown by the author. We implement it here by removing all 10 momentum portfolios from our sample and testing the asset pricing power of the NI-index on the remaining 41 test portfolios (25 Size-BM, 10 Industry, and 6 Bond portfolios). The price of risk of the NI-index is positive and significant with a sizeable adjusted R-squared of 50 percent. This simple test unequivocally rejects the claim that the pricing power of the NI-index is driven exclusively by the momentum portfolios. Maio (2023) makes several more minor points which we address in a similar fashion.

Keywords: Long run risk

JEL Classification: E00, G12

Suggested Citation

Liu, Yukun and Matthies, Ben, Is Long Run Risk Really Priced? A Reply (April 22, 2024). Available at SSRN: https://ssrn.com/abstract=4803146 or http://dx.doi.org/10.2139/ssrn.4803146

Yukun Liu (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Ben Matthies

University of Notre Dame ( email )

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