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Adaptive Testing for Alphas in Conditional Factor Models with High Dimensional Assets

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  • Huifang Ma
  • Long Feng
  • Zhaojun Wang
  • Jigang Bao

Abstract

This article focuses on testing for the presence of alpha in time-varying factor pricing models, specifically when the number of securities N is larger than the time dimension of the return series T. We introduce a maximum-type test that performs well in scenarios where the alternative hypothesis is sparse. We establish the limit null distribution of the proposed maximum-type test statistic and demonstrate its asymptotic independence from the sum-type test statistics proposed by Ma et al. Additionally, we propose an adaptive test by combining the maximum-type test and sum-type test, and we show its advantages under various alternative hypotheses through simulation studies and two real data applications.

Suggested Citation

  • Huifang Ma & Long Feng & Zhaojun Wang & Jigang Bao, 2024. "Adaptive Testing for Alphas in Conditional Factor Models with High Dimensional Assets," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 42(4), pages 1356-1366, October.
    • Handle: RePEc:taf:jnlbes:v:42:y:2024:i:4:p:1356-1366
    DOI: 10.1080/07350015.2024.2313543
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