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Which Alpha?

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Listed:
  • Francisco Barillas
  • Jay Shanken

Abstract

A common approach to comparing asset pricing models with traded factors involves a competition between models in pricing test-asset returns. We find that such practice, while seemingly reasonable, cannot be relied on to determine which is the superior model for several widely accepted criteria including statistical likelihood, Sharpe ratios and a modified HJ distance. All that matters for model comparison is the extent to which each model is able to price the factors in the other model. Given this information, test assets are actually irrelevant, whether the models are nested or non-nested.

Suggested Citation

  • Francisco Barillas & Jay Shanken, 2015. "Which Alpha?," NBER Working Papers 21698, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:21698
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    Cited by:

    1. Ball, Ray & Gerakos, Joseph & Linnainmaa, Juhani T. & Nikolaev, Valeri, 2016. "Accruals, cash flows, and operating profitability in the cross section of stock returns," Journal of Financial Economics, Elsevier, vol. 121(1), pages 28-45.
    2. Kent Daniel & David Hirshleifer & Lin Sun, 2020. "Short- and Long-Horizon Behavioral Factors," The Review of Financial Studies, Society for Financial Studies, vol. 33(4), pages 1673-1736.
    3. Alex R. Horenstein, 2017. "Betting Against Alpha," Working Papers 2017-13, University of Miami, Department of Economics.
    4. Lin, Qi, 2017. "Noisy prices and the Fama–French five-factor asset pricing model in China," Emerging Markets Review, Elsevier, vol. 31(C), pages 141-163.
    5. Guo, Bin & Zhang, Wei & Zhang, Yongjie & Zhang, Han, 2017. "The five-factor asset pricing model tests for the Chinese stock market," Pacific-Basin Finance Journal, Elsevier, vol. 43(C), pages 84-106.

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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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