A Reduced Rank Regression Approach to Tests of Asset Pricing

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A Reduced Rank Regression Approach to Tests of Asset Pricing

Author Info

Costa, Michele
Gardini, Attilio
Paruolo, Paolo

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Abstract

Both the Arbitrage Pricing Theory (APT) and the Capital Asset Pricing Model (CAPM) place restrictions of the cross sectional variation of conditional expectations of asset returns and of macro-indicators. The authors show that these restrictions imposed on the reference statistical models lead to special cases of the reduced rank regression model. The maximum likelihood problem is solved by canonical correlation analysis. Likelihood ratio tests about the number of factors underlying stock returns are straightforward to calculate, thus allowing to discriminate between competing financial theories. Moreover LR tests on the relevance of each macroeconomic indicator within a chosen model can be implemented. Some of the tests are illustrated by an application to Italian stock market data. Copyright 1997 by Blackwell Publishing Ltd

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Article provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics & Statistics.

Volume (Year): 59 (1997)
Issue (Month): 1 (February)
Pages: 163-81
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Handle: RePEc:bla:obuest:v:59:y:1997:i:1:p:163-81

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Paper
- Michele Costa & Attilio Gardini & Paolo Paruolo, 1992. "A reduced rank regression approach to tests of asset pricing," Quaderni di Dipartimento 5, Department of Statistics, University of Bologna. [Downloadable!]

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

Chan, K. C. & Chen, Nai-fu & Hsieh, David A., 1985. "An exploratory investigation of the firm size effect," Journal of Financial Economics, Elsevier, vol. 14(3), pages 451-471, September. [Downloadable!] (restricted)

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Francisco J. Goerlich-Gisbert, 1999. "Shocks agregados versus shocks sectoriales. Un análisis factorial dinámico," Investigaciones Economicas, Fundación SEPI, vol. 23(1), pages 27-53, January. [Downloadable!]
Peter Hansen, 2002. "Generalized Reduced Rank Regression," Working Papers 2002-02, Brown University, Department of Economics. [Downloadable!]

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