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Which Alpha?

Author

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  • Francisco Barillas
  • Jay Shanken

Abstract

A common approach to comparing asset pricing models involves a competition in pricing test-asset returns. In contrast, we show that for models with traded factors, when the comparison is framed appropriately in terms of success in pricing both the test-asset and factor returns, the extent to which each model is able to price the factors in the other model is what matters for model comparison. Test assets are irrelevant based on several prominent criteria. For models with nontraded factors, test assets are relevant for model comparison insofar as they are needed to identify factor-mimicking portfolio returns.

Suggested Citation

  • Francisco Barillas & Jay Shanken, 2017. "Which Alpha?," The Review of Financial Studies, Society for Financial Studies, vol. 30(4), pages 1316-1338.
    • Handle: RePEc:oup:rfinst:v:30:y:2017:i:4:p:1316-1338.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhw101
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    Cited by:

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    2. Alex R. Horenstein, 2017. "Betting Against Alpha," Working Papers 2017-13, University of Miami, Department of Economics.
    3. Kent Daniel & David Hirshleifer & Lin Sun, 2020. "Short- and Long-Horizon Behavioral Factors," The Review of Financial Studies, Society for Financial Studies, vol. 33(4), pages 1673-1736.
    4. Lin, Qi, 2017. "Noisy prices and the Fama–French five-factor asset pricing model in China," Emerging Markets Review, Elsevier, vol. 31(C), pages 141-163.
    5. Guo, Bin & Zhang, Wei & Zhang, Yongjie & Zhang, Han, 2017. "The five-factor asset pricing model tests for the Chinese stock market," Pacific-Basin Finance Journal, Elsevier, vol. 43(C), pages 84-106.

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    More about this item

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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