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A large-scale approach for evaluating asset pricing models

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  • Barras, Laurent

Abstract

Recent studies show that the standard test portfolios do not contain sufficient information to discriminate between asset pricing models. To address this issue, we develop a large-scale approach that expands the cross-section to several thousand portfolios. Our novel approach is simple, widely applicable, and allows for formal evaluation/comparison tests. Its benefits are confirmed in empirical tests of CAPM- and characteristic-based models. While these models are all misspecified, we uncover striking performance differences between them. In particular, the human capital and conditional CAPMs largely outperform the CAPM, which suggests that labor income and time-varying recession risks are primary concerns for investors.

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  • Barras, Laurent, 2019. "A large-scale approach for evaluating asset pricing models," Journal of Financial Economics, Elsevier, vol. 134(3), pages 549-569.
    • Handle: RePEc:eee:jfinec:v:134:y:2019:i:3:p:549-569
    DOI: 10.1016/j.jfineco.2019.05.007
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    Cited by:

    1. Hansen, Erwin, 2022. "Economic evaluation of asset pricing models under predictability," Journal of Empirical Finance, Elsevier, vol. 68(C), pages 50-66.
    2. Cheng, Tingting & Yan, Cheng & Yan, Yayi, 2021. "Improved inference for fund alphas using high-dimensional cross-sectional tests," Journal of Empirical Finance, Elsevier, vol. 61(C), pages 57-81.
    3. Campbell R. Harvey & Yan Liu, 2020. "False (and Missed) Discoveries in Financial Economics," Papers 2006.04269, arXiv.org.

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    More about this item

    Keywords

    Asset pricing; Model comparison; Large cross-section;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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