On Comparing Asset Pricing Models

Siddhartha Chib, Xiaming Zeng, Lingxiao Zhao

    Research output: Contribution to journalArticlepeer-review

    34 Scopus citations

    Abstract

    Revisiting the framework of (Barillas, Francisco, and Jay Shanken, 2018, Comparing asset pricing models, The Journal of Finance 73, 715–754). BS henceforth, we show that the Bayesian marginal likelihood-based model comparison method in that paper is unsound : the priors on the nuisance parameters across models must satisfy a change of variable property for densities that is violated by the Jeffreys priors used in the BS method. Extensive simulation exercises confirm that the BS method performs unsatisfactorily. We derive a new class of improper priors on the nuisance parameters, starting from a single improper prior, which leads to valid marginal likelihoods and model comparisons. The performance of our marginal likelihoods is significantly better, allowing for reliable Bayesian work on which factors are risk factors in asset pricing models.

    Original languageEnglish
    Pages (from-to)551-577
    Number of pages27
    JournalThe Journal of Finance
    Volume75
    Issue number1
    DOIs
    StatePublished - Feb 1 2020

    Fingerprint

    Dive into the research topics of 'On Comparing Asset Pricing Models'. Together they form a unique fingerprint.

    Cite this