Selecting and Testing Asset-Pricing Models: A Stepwise Approach

• 成果类型: Article; Early Access
• 署名作者: Feng, Guanhao; Lan, Wei; Wang, Hansheng; Zhang, Jun
• 署名单位: City University of Hong Kong; Southwestern University of Finance & Economics - China; Southwestern University of Finance & Economics - China; Peking University; Southeast University - China
• 刊物名称: MANAGEMENT SCIENCE
• ISSN/ISSBN: 0025-1909
• DOI: 10.1287/mnsc.2024.07804
• 发表日期: 2026
• 关键词: asset-pricing test; Mean-variance efficiency; stepwise selection; model comparison; Sharpe ratio

摘要

The asset-pricing literature emphasizes factor models that minimize pricing errors but overlooks unselected candidate factors that could enhance the performance of test assets. This paper proposes a framework for factor model selection and testing by (i) selecting the optimal model that spans the joint efficient frontier of test assets and all candidate factors and (ii) testing pricing performance on both test assets and unselected candidate factors. Our framework updates a baseline model (e.g., capital asset-pricing model) sequentially by adding or removing factors based on asset-pricing tests. Ensuring model selection consistency, our framework utilizes the asset-pricing duality; minimizing crosssectionally unexplained pricing errors aligns with maximizing the Sharpe ratio of the selected factor model. Empirical evidence shows that workhorse factor models fail assetpricing tests, whereas our proposed eight-factor model is not rejected and exhibits robust out-of-sample performance.