Publication Type

Journal Article

Version

submittedVersion

Publication Date

1-2020

Abstract

For conditional time-varying factor models with high dimensional assets, this article proposes a high dimensional alpha (HDA) test to assess whether there exist abnormal returns on securities (or portfolios) over the theoretical expected returns. To employ this test effectively, a constant coefficient test is also introduced. It examines the validity of constant alphas and factor loadings. Simulation studies and an empirical example are presented to illustrate the finite sample performance and the usefulness of the proposed tests. Using the HDA test, the empirical example demonstrates that the FF three-factor model (Fama and French, 1993) is better than CAPM (Sharpe, 1964) in explaining the mean-variance efficiency of both the Chinese and US stock markets. Furthermore, our results suggest that the US stock market is more efficient in terms of mean-variance efficiency than the Chinese stock market.

Keywords

Conditional alpha test, High dimensional data, Mean-variance efficiency, Spline estimator, Time-varying coefficient

Discipline

Econometrics

Research Areas

Econometrics

Publication

Journal of Business and Economic Statistics

Volume

38

Issue

1

First Page

214

Last Page

227

ISSN

0735-0015

Identifier

10.1080/07350015.2018.1482758

Publisher

Taylor & Francis

Copyright Owner and License

Authors

Comments

SMU Economics and Statistics Working Paper Series 09-2018

Additional URL

https://doi.org/10.1080/07350015.2018.1482758

Included in

Econometrics Commons

Share

COinS