{"title":"On Robust Inference for Consumption-based Asset Pricing","authors":"Tim A. Kroencke","doi":"10.2139/ssrn.3562169","DOIUrl":null,"url":null,"abstract":"Kleibergen and Zhan (Robust Inference for Consumption-based Asset Pricing, Journal of Finance, 2020) propose a new approach to test consumption-based asset pricing models that is robust to the useless factor problem, i.e. concluding that a factor is priced when the factor is actually uncorrelated with the test assets. They find that recently proposed factors do not pass their test, which they attribute to a lack of factor correlation with the test assets. This conclusion is odd, as the factor correlation is significant and economically large, often 0.40 and above. Instead, I show that their testing approach lacks power in small samples. I propose simple remedies that help to achieve robust consumption-based asset pricing that comes with power.","PeriodicalId":209192,"journal":{"name":"ERN: Asset Pricing Models (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0000,"publicationDate":"2021-10-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"ERN: Asset Pricing Models (Topic)","FirstCategoryId":"1085","ListUrlMain":"https://doi.org/10.2139/ssrn.3562169","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"","JCRName":"","Score":null,"Total":0}
引用次数: 0
Abstract
Kleibergen and Zhan (Robust Inference for Consumption-based Asset Pricing, Journal of Finance, 2020) propose a new approach to test consumption-based asset pricing models that is robust to the useless factor problem, i.e. concluding that a factor is priced when the factor is actually uncorrelated with the test assets. They find that recently proposed factors do not pass their test, which they attribute to a lack of factor correlation with the test assets. This conclusion is odd, as the factor correlation is significant and economically large, often 0.40 and above. Instead, I show that their testing approach lacks power in small samples. I propose simple remedies that help to achieve robust consumption-based asset pricing that comes with power.