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Efficient Mimicking Portfolios in Asset Pricing Tests

Author

Listed:
  • Jinyong Kim

    (University of Seoul)

  • Kun Ho Kim

    (Yeshiva University)

  • Jeong Hwan Lee

    (Hanyang University)

Abstract

The classic cross-sectional regression (CSR) and mimicking portfolio (MIM) procedures estimate factor risk premia on a test asset span and the resulting tests of asset pricing models are performed with reduced degrees of freedom. Although we can restrict the risk premia of traded factors to equal expected returns, imposing such restrictions on nontraded factors is difficult, which may prevent full performance evaluation. We suggest testing with efficient MIMs that project factors onto a return space spanned by test assets and benchmark traded factors. The generalized method of moments (GMM) tests show that this approach generates more powerful tests and fair comparison against a benchmark model.

Suggested Citation

  • Jinyong Kim & Kun Ho Kim & Jeong Hwan Lee, 2021. "Efficient Mimicking Portfolios in Asset Pricing Tests," Korean Economic Review, Korean Economic Association, vol. 37, pages 399-417.
    • Handle: RePEc:kea:keappr:ker-20210701-37-2-07
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Asset Pricing Test; Nontraded Factor; Efficient Mimicking Portfolio; Power;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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