IDEAS home Printed from https://ideas.repec.org/a/eee/empfin/v68y2022icp160-172.html
   My bibliography  Save this article

New evidence on Bayesian tests of global factor pricing models

Author

Listed:
  • Qiao, Zhuo
  • Wang, Yan
  • Lam, Keith S.K.

Abstract

To identify the best global factor pricing model is crucial in international asset pricing literature. This study adopts the Bayesian methods of Chib et al. (2020b) and Chib and Zeng (2020) to estimate and compare 14,322 Gaussian and Student-t distributed global factor pricing models. We find strong evidence that Student-t distributed models significantly outperform Gaussian distributed models in both in-sample and out-of-sample tests. This finding highlights the importance of using the Student-t distributions to model the fat tails in global risk factor data. Analysis reveals that the best global factor pricing model is a Student-t distributed factor model with three degrees of freedom and seven risk factors including the six factors of Fama and French (2018) and the betting against beta (BAB) factor of Frazzini and Pedersen (2014). Our results are robust for different estimation samples and in both relative and absolute pricing performance tests.

Suggested Citation

  • Qiao, Zhuo & Wang, Yan & Lam, Keith S.K., 2022. "New evidence on Bayesian tests of global factor pricing models," Journal of Empirical Finance, Elsevier, vol. 68(C), pages 160-172.
    • Handle: RePEc:eee:empfin:v:68:y:2022:i:c:p:160-172
    DOI: 10.1016/j.jempfin.2022.07.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0927539822000500
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jempfin.2022.07.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Zhou, Guofu, 1993. "Asset-Pricing Tests under Alternative Distributions," Journal of Finance, American Finance Association, vol. 48(5), pages 1927-1942, December.
    2. Siddhartha Chib & Minchul Shin & Anna Simoni, 2018. "Bayesian Estimation and Comparison of Moment Condition Models," Journal of the American Statistical Association, Taylor & Francis Journals, vol. 113(524), pages 1656-1668, October.
    3. Fama, Eugene F. & French, Kenneth R., 2017. "International tests of a five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 123(3), pages 441-463.
    4. Tarun Chordia & Amit Goyal & Alessio Saretto & Andrew KarolyiEditor, 2020. "Anomalies and False Rejections," Review of Finance, European Finance Association, vol. 33(5), pages 2134-2179.
    5. Solnik, Bruno H., 1974. "An equilibrium model of the international capital market," Journal of Economic Theory, Elsevier, vol. 8(4), pages 500-524, August.
    6. Jean‐Marie Dufour & Lynda Khalaf & Marie‐Claude Beaulieu, 2003. "Exact Skewness–Kurtosis Tests for Multivariate Normality and Goodness‐of‐Fit in Multivariate Regressions with Application to Asset Pricing Models," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(s1), pages 891-906, December.
    7. Errunza, Vihang & Losq, Etienne, 1985. "International Asset Pricing under Mild Segmentation: Theory and Test," Journal of Finance, American Finance Association, vol. 40(1), pages 105-124, March.
    8. Barillas, Francisco & Kan, Raymond & Robotti, Cesare & Shanken, Jay, 2020. "Model Comparison with Sharpe Ratios," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 55(6), pages 1840-1874, September.
    9. Raymond Kan & Cesare Robotti & Jay Shanken, 2013. "Pricing Model Performance and the Two‐Pass Cross‐Sectional Regression Methodology," Journal of Finance, American Finance Association, vol. 68(6), pages 2617-2649, December.
    10. Dumas, Bernard & Solnik, Bruno, 1995. "The World Price of Foreign Exchange Risk," Journal of Finance, American Finance Association, vol. 50(2), pages 445-479, June.
    11. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    12. Francisco Barillas & Jay Shanken, 2018. "Comparing Asset Pricing Models," Journal of Finance, American Finance Association, vol. 73(2), pages 715-754, April.
    13. Frazzini, Andrea & Pedersen, Lasse Heje, 2014. "Betting against beta," Journal of Financial Economics, Elsevier, vol. 111(1), pages 1-25.
    14. Siddhartha Chib & Xiaming Zeng, 2020. "Which Factors are Risk Factors in Asset Pricing? A Model Scan Framework," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 38(4), pages 771-783, October.
    15. Kewei Hou & G. Andrew Karolyi & Bong-Chan Kho, 2011. "What Factors Drive Global Stock Returns?," The Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2527-2574.
    16. Fama, Eugene F. & French, Kenneth R., 2012. "Size, value, and momentum in international stock returns," Journal of Financial Economics, Elsevier, vol. 105(3), pages 457-472.
    17. John M. Griffin & Xiuqing Ji & J. Spencer Martin, 2003. "Momentum Investing and Business Cycle Risk: Evidence from Pole to Pole," Journal of Finance, American Finance Association, vol. 58(6), pages 2515-2547, December.
    18. Fama, Eugene F., 1996. "Multifactor Portfolio Efficiency and Multifactor Asset Pricing," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(4), pages 441-465, December.
    19. Kuntara Pukthuanthong & Richard Roll & Avanidhar Subrahmanyam, 2019. "A Protocol for Factor Identification," The Review of Financial Studies, Society for Financial Studies, vol. 32(4), pages 1573-1607.
    20. Fama, Eugene F. & French, Kenneth R., 2015. "A five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 116(1), pages 1-22.
    21. Grauer, Frederick L. A. & Litzenberger, Robert H. & Stehle, Richard E., 1976. "Sharing rules and equilibrium in an international capital market under uncertainty," Journal of Financial Economics, Elsevier, vol. 3(3), pages 233-256, June.
    22. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    23. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    24. Gibbons, Michael R & Ross, Stephen A & Shanken, Jay, 1989. "A Test of the Efficiency of a Given Portfolio," Econometrica, Econometric Society, vol. 57(5), pages 1121-1152, September.
    25. Fletcher, Jonathan, 2018. "Bayesian tests of global factor models," Journal of Empirical Finance, Elsevier, vol. 48(C), pages 279-289.
    26. Clifford S. Asness & Tobias J. Moskowitz & Lasse Heje Pedersen, 2013. "Value and Momentum Everywhere," Journal of Finance, American Finance Association, vol. 68(3), pages 929-985, June.
    27. Siddhartha Chib & Xiaming Zeng & Lingxiao Zhao, 2020. "On Comparing Asset Pricing Models," Journal of Finance, American Finance Association, vol. 75(1), pages 551-577, February.
    28. repec:bla:jfinan:v:44:y:1989:i:4:p:889-908 is not listed on IDEAS
    29. Solnik, Bruno, 1983. "International Arbitrage Pricing Theory," Journal of Finance, American Finance Association, vol. 38(2), pages 449-457, May.
    30. Zhang, Xiaoyan, 2006. "Specification tests of international asset pricing models," Journal of International Money and Finance, Elsevier, vol. 25(2), pages 275-307, March.
    31. Tarun Chordia & Amit Goyal & Alessio Saretto, 2020. "Anomalies and False Rejections," The Review of Financial Studies, Society for Financial Studies, vol. 33(5), pages 2134-2179.
    32. Eugene F. Fama & Kenneth R. French, 2016. "Dissecting Anomalies with a Five-Factor Model," The Review of Financial Studies, Society for Financial Studies, vol. 29(1), pages 69-103.
    33. Li, Zhi-Chun & Wu, Qiao-Yu & Yang, Hai, 2019. "A theory of auto ownership rationing," Transportation Research Part B: Methodological, Elsevier, vol. 127(C), pages 125-146.
    34. Dai Yuan Li & Cong Wei Xie & Shu Hao Chen & Xiu Xiang Zou, 2019. "Research on the Pricing of Shared Ownership Housing," Applied Economics and Finance, Redfame publishing, vol. 6(1), pages 30-44, January.
    35. Raymond Kan & Guofu Zhou, 2017. "Modeling non-normality using multivariatet: implications for asset pricing," China Finance Review International, Emerald Group Publishing Limited, vol. 7(1), pages 2-32, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Fletcher, Jonathan, 2018. "Bayesian tests of global factor models," Journal of Empirical Finance, Elsevier, vol. 48(C), pages 279-289.
    2. Chaieb, Ines & Langlois, Hugues & Scaillet, Olivier, 2021. "Factors and risk premia in individual international stock returns," Journal of Financial Economics, Elsevier, vol. 141(2), pages 669-692.
    3. Long, Huaigang & Zaremba, Adam & Zhou, Wenyu & Bouri, Elie, 2022. "Macroeconomics matter: Leading economic indicators and the cross-section of global stock returns," Journal of Financial Markets, Elsevier, vol. 61(C).
    4. Söhnke M. Bartram & Harald Lohre & Peter F. Pope & Ananthalakshmi Ranganathan, 2021. "Navigating the factor zoo around the world: an institutional investor perspective," Journal of Business Economics, Springer, vol. 91(5), pages 655-703, July.
    5. Huber, Daniel & Jacobs, Heiko & Müller, Sebastian & Preissler, Fabian, 2023. "International factor models," Journal of Banking & Finance, Elsevier, vol. 150(C).
    6. Cakici, Nusret & Zaremba, Adam, 2023. "Recency bias and the cross-section of international stock returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 84(C).
    7. Zaremba, Adam & Cakici, Nusret & Bianchi, Robert J. & Long, Huaigang, 2023. "Interest rate changes and the cross-section of global equity returns," Journal of Economic Dynamics and Control, Elsevier, vol. 147(C).
    8. Hollstein, Fabian, 2022. "The world of anomalies: Smaller than we think?," Journal of International Money and Finance, Elsevier, vol. 129(C).
    9. Gagliardini, Patrick & Ossola, Elisa & Scaillet, Olivier, 2019. "Estimation of large dimensional conditional factor models in finance," Working Papers unige:125031, University of Geneva, Geneva School of Economics and Management.
    10. Dahlquist, Magnus & Odegaard, Bernt Arne, 2018. "A Review of Norges Bank's Active Management of the Government Pension Fund Global," UiS Working Papers in Economics and Finance 2018/1, University of Stavanger.
    11. Lu Zhang, 2017. "The Investment CAPM," European Financial Management, European Financial Management Association, vol. 23(4), pages 545-603, September.
    12. Kolari, James W. & Huang, Jianhua Z. & Butt, Hilal Anwar & Liao, Huiling, 2022. "International tests of the ZCAPM asset pricing model," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 79(C).
    13. Sadok El Ghoul & Omrane Guedhami & Sattar A. Mansi & Oumar Sy, 2023. "Event studies in international finance research," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 54(2), pages 344-364, March.
    14. Cakici, Nusret & Zaremba, Adam, 2022. "Salience theory and the cross-section of stock returns: International and further evidence," Journal of Financial Economics, Elsevier, vol. 146(2), pages 689-725.
    15. Hanauer, Matthias X. & Lauterbach, Jochim G., 2019. "The cross-section of emerging market stock returns," Emerging Markets Review, Elsevier, vol. 38(C), pages 265-286.
    16. Hanauer, Matthias X. & Jansen, Maarten & Swinkels, Laurens & Zhou, Weili, 2024. "Factor models for Chinese A-shares," International Review of Financial Analysis, Elsevier, vol. 91(C).
    17. Wagner, Alexander F. & Schrimpf, Paul & Petzev, Ivan, 2015. "Has the Pricing of Stocks Become More Global?," CEPR Discussion Papers 10966, C.E.P.R. Discussion Papers.
    18. Huynh, Thanh D., 2017. "Conditional asset pricing in international equity markets," International Review of Economics & Finance, Elsevier, vol. 49(C), pages 168-189.
    19. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, April.
    20. Massa, Massimo & O'Donovan, James & Zhang, Hong, 2022. "International asset pricing with strategic business groups1," Journal of Financial Economics, Elsevier, vol. 145(2), pages 339-361.

    More about this item

    Keywords

    Bayesian analysis; Model comparison; Fat tails; International asset pricing;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:empfin:v:68:y:2022:i:c:p:160-172. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jempfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.