TY  - JOUR
AU  - Burnside,A. Craig
TI  - Empirical Asset Pricing and Statistical Power in the Presence of Weak Risk Factors
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13357
PY  - 2007
Y2  - August 2007
UR  - http://www.nber.org/papers/w13357
L1  - http://www.nber.org/papers/w13357.pdf
N1  - Author contact info:
Craig Burnside
Department of Economics
Duke University
213 Social Sciences Building
Durham, NC 27708-0097
Tel: 919/660-1808
Fax: 919/684-8974
E-Mail: craig.burnside@duke.edu
AB  - The risk factors in many consumption-based asset pricing models display statistically weak correlation with the returns being priced. Some GMM-based procedures used to test these models have very low power to reject proposed stochastic discount factors (SDFs) when they are misspecified and the covariance matrix of the asset returns with the risk factors has less than full column rank. Consequently, these estimators provide potentially misleading positive assessments of the SDFs. Working with SDFs specified in terms of demeaned risk factors improves the performance of GMM but the power to reject misspecified SDFs may remain low. Two summary tests for failure of the rank condition have reasonable power, and lead to no Type I errors in Monte Carlo experiments.
ER  -