Comparing Asset Pricing Models
A Bayesian asset-pricing test is derived that is easily computed in closed-form from the standard F-statistic. Given a set of candidate traded factors, we develop a related test procedure that permits an analysis of model comparison, i.e., the computation of model probabilities for the collection of all possible pricing models that are based on subsets of the given factors. We find that the recent models of Hou, Xue and Zhang (2015a,b) and Fama and French (2015a,b) are both dominated by five and six-factor models that include a momentum factor, along with value and profitability factors that are updated monthly.
Thanks to Doron Avramov, Mark Fisher, Amit Goyal, Lubos Pastor, Tim Simin, Rex Thompson, Pietro Veronesi and seminar participants at the Northern Finance Association meeting, Southern Methodist University, the Universities of Geneva, Luxembourg and Lausanne, Imperial College and Ohio State University. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.