Which Alpha?

Abstract

A common approach to comparing asset pricing models involves a competition in pricing test-asset returns. In contrast, we show that for models with traded factors, when the comparison is framed appropriately in terms of success in pricing both the test-asset and factor returns, the extent to which each model is able to price the factors in the other model is what matters for model comparison. Test assets are irrelevant based on several prominent criteria. For models with nontraded factors, test assets are relevant for model comparison insofar as they are needed to identify factor-mimicking portfolio returns. Received October 29, 2015; editorial decision September 6, 2016 by Editor Andrew Karolyi.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 337 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.