Testing Pricing Errors of Models with Latent Factors and Firm Characteristics as Covariances

• 成果类型: Article
• 署名作者: Zhang, Chu
• 署名单位: Hong Kong University of Science & Technology
• 刊物名称: MANAGEMENT SCIENCE
• ISSN/ISSBN: 0025-1909
• DOI: 10.1287/mnsc.2023.4768
• 发表日期: 2024
• 页码: 1706-1728
• 关键词: beta pricing models; pricing errors (alphas); return-predictive firm characteristics; statistically extracted latent factors

摘要

This paper extends the methodology of statistically extracting latent factors in settings with return-predictive firm characteristics as conditional covariances (betas) between returns and factors. The main feature is that the pricing errors (alphas) are specified to be orthogonal to the affine-transformed firm characteristics as the betas with one component of pricing errors lying outside the space spanned by the firm characteristics. The specification is shown to make substantial differences with the extant literature as the zero pricing error hypothesis is strongly rejected for various models with commonly used firm characteristics.