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Identification-Robust Inference on Risk Premia of Mimicking Portfolios of Non-traded Factors

Author

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  • Frank Kleibergen
  • Zhaoguo Zhan

Abstract

Mimicking portfolios of economic (non-traded) factors are commonly constructed by projecting the factors on a set of base assets. When these factors are associated with small betas, the beta-estimator using their mimicking portfolios has non-standard limit behavior. This jeopardizes inference on risk premia in the commonly used Fama and MacBeth (1973) two-pass procedure. Using sorting or the average excess returns on the mimicking portfolios to estimate the risk premia leads to similar non-standard behavior. We therefore propose a novel test for the risk premia on mimicking portfolios. Its validity does not depend on the magnitude of the betas. Simulation evidence suggests that it performs well in terms of size and power. We use it to analyze the risk premium on the leverage factor of Adrian, Etula, and Muir (2014). Our results indicate that the leverage factor is a weak factor which leads to substantially different results for its risk premium.

Suggested Citation

  • Frank Kleibergen & Zhaoguo Zhan, 2018. "Identification-Robust Inference on Risk Premia of Mimicking Portfolios of Non-traded Factors," Journal of Financial Econometrics, Oxford University Press, vol. 16(2), pages 155-190.
    • Handle: RePEc:oup:jfinec:v:16:y:2018:i:2:p:155-190.
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nby005
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    Citations

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    Cited by:

    1. Zhang, Xiang & Liu, Yangyi & Wu, Kun & Maillet, Bertrand, 2021. "Tradable or nontradable factors—what does the Hansen–Jagannathan distance tell us?," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 853-879.
    2. Patrick Gagliardini & Diego Ronchetti, 2020. "Comparing Asset Pricing Models by the Conditional Hansen-Jagannathan Distance," Journal of Financial Econometrics, Oxford University Press, vol. 18(2), pages 333-394.
    3. Frank Kleibergen & Lingwei Kong & Zhaoguo Zhan, 2023. "Identification Robust Testing of Risk Premia in Finite Samples," Journal of Financial Econometrics, Oxford University Press, vol. 21(2), pages 263-297.
    4. Frank Kleibergen & Zhaoguo Zhan, 2022. "Misspecification and Weak Identification in Asset Pricing," Papers 2206.13600, arXiv.org.
    5. Lingwei Kong, 2023. "Weak (Proxy) Factors Robust Hansen-Jagannathan Distance For Linear Asset Pricing Models," Papers 2307.14499, arXiv.org.
    6. 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.
    7. Beaulieu, Marie-Claude & Dufour, Jean-Marie & Khalaf, Lynda & Melin, Olena, 2023. "Identification-robust beta pricing, spanning, mimicking portfolios, and the benchmark neutrality of catastrophe bonds," Journal of Econometrics, Elsevier, vol. 236(1).

    More about this item

    Keywords

    asset pricing; economic factor; mimicking portfolio; non-standard distribution; robust inference;
    All these keywords.

    JEL classification:

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

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