Publication Type

Journal Article

Version

submittedVersion

Publication Date

4-2015

Abstract

This article 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. Simulations indicate that our estimates and tests perform well in finite samples. In our empirical analysis, we use our new method to examine the performance of the conditional capital asset pricing model (CAPM), which has generated controversial results in the recent asset-pricing literature.

Keywords

Specification tests, Conditional CAPM, Semiparametric method, Nonparametric method, Conditional factor models

Discipline

Econometrics

Research Areas

Econometrics

Publication

Journal of Business and Economic Statistics

Volume

33

Issue

2

First Page

203

Last Page

220

ISSN

0735-0015

Identifier

10.1080/07350015.2014.940082

Publisher

Taylor & Francis: SSH Journals

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1080/07350015.2014.940082

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Econometrics Commons

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