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Comparing Asset Pricing Models

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  • Francisco Barillas
  • Jay Shanken

Abstract

A Bayesian asset-pricing test is derived that is easily computed in closed-form from the standard F-statistic. Given a set of candidate traded factors, we develop a related test procedure that permits an analysis of model comparison, i.e., the computation of model probabilities for the collection of all possible pricing models that are based on subsets of the given factors. We find that the recent models of Hou, Xue and Zhang (2015a,b) and Fama and French (2015a,b) are both dominated by five and six-factor models that include a momentum factor, along with value and profitability factors that are updated monthly.

Suggested Citation

  • Francisco Barillas & Jay Shanken, 2015. "Comparing Asset Pricing Models," NBER Working Papers 21771, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21771
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Gospodinov, Nikolay & Kan, Raymond & Robotti, Cesare, 2019. "Too good to be true? Fallacies in evaluating risk factor models," Journal of Financial Economics, Elsevier, vol. 132(2), pages 451-471.
    2. Marie Briere & Ariane Szafarz, 2015. "Factor-Based v. Industry-Based Asset Allocation: The Contest," Working Papers CEB 15-035, ULB -- Universite Libre de Bruxelles.
    3. repec:bla:eufman:v:23:y:2017:i:4:p:545-603 is not listed on IDEAS
    4. Robert F. Stambaugh & Yu Yuan, 2017. "Mispricing Factors," Review of Financial Studies, Society for Financial Studies, vol. 30(4), pages 1270-1315.
    5. repec:eee:jfinec:v:131:y:2019:i:2:p:362-377 is not listed on IDEAS
    6. Lu Zhang, 2017. "The Investment CAPM," European Financial Management, European Financial Management Association, vol. 23(4), pages 545-603, September.
    7. repec:oup:rfinst:v:30:y:2017:i:4:p:1316-1338. is not listed on IDEAS
    8. Allen, D.E. & McAleer, M.J., 2019. "Drawbacks in the 3-Factor Approach of Fama and French (2018)," Econometric Institute Research Papers EI2019-20, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    9. repec:eee:ememar:v:38:y:2019:i:c:p:265-286 is not listed on IDEAS
    10. Francisco Barillas & Jay Shanken, 2017. "Which Alpha?," Review of Financial Studies, Society for Financial Studies, vol. 30(4), pages 1316-1338.
    11. Kewei Hou & Haitao Mo & Chen Xue & Lu Zhang, 2019. "Which Factors?," Review of Finance, European Finance Association, vol. 23(1), pages 1-35.
    12. repec:eee:finlet:v:28:y:2019:i:c:p:281-291 is not listed on IDEAS
    13. repec:eee:ememar:v:38:y:2019:i:c:p:219-238 is not listed on IDEAS

    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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