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On comparing zero-alpha tests across multifactor asset pricing models

Author

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  • De Moor, Lieven
  • Dhaene, Geert
  • Sercu, Piet
Abstract
Evaluating competing multifactor asset pricing models involves comparing the statistical significance of their mean pricing errors (alphas). Unfortunately, this comparison favors imprecisely estimated models because p-values tend to be higher in more noisy models. To avoid false impressions of relative success at tests for zero mean pricing errors, we develop a notion of comparative p-values and suggest comparing these instead of the raw p-values. This comparison gives more precisely estimated models a fairer chance or, equivalently, quantifies how much easier it is for imprecisely estimated models, by comparison, to pass the test.

Suggested Citation

  • De Moor, Lieven & Dhaene, Geert & Sercu, Piet, 2015. "On comparing zero-alpha tests across multifactor asset pricing models," Journal of Banking & Finance, Elsevier, vol. 61(S2), pages 235-240.
    • Handle: RePEc:eee:jbfina:v:61:y:2015:i:s2:p:s235-s240
    DOI: 10.1016/j.jbankfin.2015.08.032
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    Cited by:

    1. Francisco Barillas & Jay Shanken, 2018. "Comparing Asset Pricing Models," Journal of Finance, American Finance Association, vol. 73(2), pages 715-754, April.
    2. Zhongzhi Lawrence He, 2018. "Comparing Asset Pricing Models: Distance-based Metrics and Bayesian Interpretations," Papers 1803.01389, arXiv.org.

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