Pesaran, M. Hashem and Yamagata, Takashi orcid.org/0000-0001-5949-8833 (2023) Testing for Alpha in Linear Factor Pricing Models with a Large Number of Securities. Journal of Financial Econometrics. ISSN 1479-8409
Abstract
This paper considers tests of alpha in linear factor pricing models when the number of securities, N, is much larger than the time dimension, T, of the individual return series. We focus on class of tests that are based on Student t tests of individual securities which have a number of advantages over the existing standardised Wald type tests, and propose a test procedure that allows for non-Gaussianity and general forms of weakly cross correlated errors. It does not require estimation of an invertible error covariance matrix, it is much faster to implement, and is valid even if N is much larger than T. We also show that the proposed test can account for some limited degree of pricing errors allowed under Ross's Arbitrage Pricing Theory condition. Monte Carlo evidence shows that the proposed test performs remarkably well even when T=60 and N=5,000. The test is applied to monthly returns on securities in the S&P 500 at the end of each month in real time, using rolling windows of size 60. Statistically significant evidence against Sharpe-Lintner CAPM, Fama-French three and five factor models are found mainly during the period of Great Recession (2007M12-2009M06)
Metadata
Item Type: | Article |
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Authors/Creators: |
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Copyright, Publisher and Additional Information: | © The Author(s) 2023 |
Dates: |
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Institution: | The University of York |
Academic Units: | The University of York > Faculty of Social Sciences (York) > Economics and Related Studies (York) |
Depositing User: | Pure (York) |
Date Deposited: | 11 Jan 2023 15:10 |
Last Modified: | 02 Nov 2024 01:25 |
Published Version: | https://doi.org/10.1093/jjfinec/nbad002 |
Status: | Published online |
Refereed: | Yes |
Identification Number: | 10.1093/jjfinec/nbad002 |
Open Archives Initiative ID (OAI ID): | oai:eprints.whiterose.ac.uk:195190 |
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Description: Testing for Alpha in Linear Factor Pricing Models with a Large Number of Securities
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