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A Combined Approach to the Inference of Conditional Factor Models

Author

Listed:
  • Yan Li

    (Department of Finance, Temple University, Philadelphia, PA 19122)

  • Liangjun Su

    (School of Economics, Singapore Management University, Singapore, 178903)

  • Yuewu Xu

    (School of Business, Fordham University, New York, NY 10019)

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. 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 CAPM, which has generated controversial results in the recent asset-pricing literature.

Suggested Citation

  • Yan Li & Liangjun Su & Yuewu Xu, 2014. "A Combined Approach to the Inference of Conditional Factor Models," Working Papers 10-2014, Singapore Management University, School of Economics.
    • Handle: RePEc:siu:wpaper:10-2014
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    File URL: https://mercury.smu.edu.sg/rsrchpubupload/20336/10-2014.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Wolter, James Lewis, 2016. "Kernel estimation of hazard functions when observations have dependent and common covariates," Journal of Econometrics, Elsevier, vol. 193(1), pages 1-16.
    2. Sainan Jin & Liangjun Su & Yonghui Zhang, 2015. "Nonparametric testing for anomaly effects in empirical asset pricing models," Empirical Economics, Springer, vol. 48(1), pages 9-36, February.
    3. James Wolter, 2015. "Kernel Estimation Of Hazard Functions When Observations Have Dependent and Common Covariates," Economics Series Working Papers 761, University of Oxford, Department of Economics.
    4. Mikihito Nishi, 2024. "Estimating Time-Varying Parameters of Various Smoothness in Linear Models via Kernel Regression," Papers 2406.14046, arXiv.org, revised Oct 2024.

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    More about this item

    Keywords

    Conditional Factor Models; Specification Tests; Semiparametric Method; Nonparametric Method; Conditional CAPM.;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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