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Testing and Ranking of Asset Pricing Models Using the GRS Statistic

Author

Listed:
  • Mark J. Kamstra

    (Schulich School of Business, Room N204-C, York University, 4700 Keele St., Toronto, ON M3J 1P3, Canada
    These authors contributed equally to this work.)

  • Ruoyao Shi

    (Department of Economics, University of California Riverside, 900 University Avenue, Riverside, CA 92521, USA
    These authors contributed equally to this work.)

Abstract

We clear up an ambiguity in the statement of the GRS statistic by providing the correct formula of the GRS statistic and the first proof of its F-distribution in the general multiple-factor case. Casual generalization of the Sharpe-ratio-based interpretation of the single-factor GRS statistic to the multiple-portfolio case makes experts in asset pricing studies susceptible to an incorrect formula. We illustrate the consequences of using the incorrect formulas that the ambiguity in GRS leads to—over-rejecting and misranking asset pricing models. In addition, we suggest a new approach to ranking models using the GRS statistic p -value.

Suggested Citation

  • Mark J. Kamstra & Ruoyao Shi, 2024. "Testing and Ranking of Asset Pricing Models Using the GRS Statistic," JRFM, MDPI, vol. 17(4), pages 1-25, April.
    • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:4:p:168-:d:1379260
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