TY - JOUR
T1 - On Comparing Asset Pricing Models
AU - Chib, Siddhartha
AU - Zeng, Xiaming
AU - Zhao, Lingxiao
N1 - Publisher Copyright:
© 2019 the American Finance Association
PY - 2020/2/1
Y1 - 2020/2/1
N2 - 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.
AB - 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.
UR - http://www.scopus.com/inward/record.url?scp=85075420286&partnerID=8YFLogxK
U2 - 10.1111/jofi.12854
DO - 10.1111/jofi.12854
M3 - Article
AN - SCOPUS:85075420286
SN - 0022-1082
VL - 75
SP - 551
EP - 577
JO - The Journal of Finance
JF - The Journal of Finance
IS - 1
ER -