A Skeptical Appraisal of Robust Asset Pricing Tests

(joint with Julian Thimme)

Tim Alexander Kroencke

Thursday 25 Nov 2021, 12:00 - 13:00
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We analyse the size and power of a large number of 'robust' asset pricing tests, investigating the hypothesis that the price of risk of a candidate factor is equal to zero.

Different from earlier studies, our bootstrap approach puts all tests on an equal footing and focuses on sample sizes comparable to standard applications in asset pricing research. Thus, our paper provides guidance for researchers about which method to use. We find that the classic Fama-MacBeth/Shanken approach rarely over-rejects useless factors and provides a reasonable balance between size and power. In contrast, some of the “robust” methods suffer from poor power in realistic sample sizes, especially in situations where the asset pricing model is mildly misspecified.


If you would like to participate in the seminar, please send an email to the secretariat of Econometrics, eb-secr@ese.eur.nl.

More information

Secretariat Econometrics
Phone: +31 (0)10 408 12 59/ 12 64
Email: eb-secr@ese.eur.nl

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