Publication Type
Working Paper
Version
publishedVersion
Publication Date
8-2014
Abstract
This paper develops a new methodology for estimating and testing conditional factor models in finance. We propose a two-stage procedure that naturally unifies the two existing approaches in the finance literature -- the parametric approach and the nonparametric approach. Our combined approach possesses important advantages over both methods. Using our two-stage combined estimator, we derive new test statistics for investigating key hypotheses in the context of conditional factor models. Our tests can be performed on a single asset or jointly across multiple assets. We further propose a novel test to directly check whether the parametric model used in our first stage is correctly specified. In our empirical analysis, we use our new method to examine the performance of the conditional CAPM, which has generated controversial results in the recent asset-pricing literature.
Keywords
Conditional Factor Models, Specification Tests, Semiparametric Method, Non-parametric Method, Conditional CAPM
Discipline
Econometrics
Research Areas
Econometrics
First Page
1
Last Page
47
Publisher
SMU Economics and Statistics Working Paper Series, No. 10-2014
City or Country
Singapore
Citation
LI, Yan; SU, Liangjun; and XU, Yuewu.
A Combined Approach to the Inference of Conditional Factor Models. (2014). 1-47.
Available at: https://ink.library.smu.edu.sg/soe_research/1592
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Comments
Published in Journal of Business and Economic Statistics https://doi.org/10.1080/07350015.2014.940082