Adaptive Testing for Alphas in Conditional Factor Models with High Dimensional Assets

2023/07/18 by Huifang Ma, Long Feng, MA, Huifang +3
Decision Sciences · Economics, Econometrics and Finance · #Banking stability, regulation, efficiency #Credit Risk and Financial Regulations #FOS: Computer and information sciences #Methodology (stat.ME) #Probability and Risk Models

paper · pdf · doi:10.48550/arxiv.2307.09397

openalex publication_date 2023/07/18 · openalex created_date 2023/07/20 · openalex updated_date 2026/07/28

Abstract

This paper focuses on testing for the presence of alpha in time-varying factor pricing models, specifically when the number of securities N is larger than the time dimension of the return series T. We introduce a maximum-type test that performs well in scenarios where the alternative hypothesis is sparse. We establish the limit null distribution of the proposed maximum-type test statistic and demonstrate its asymptotic independence from the sum-type test statistics proposed by Ma et al.(2020).Additionally, we propose an adaptive test by combining the maximum-type test and sum-type test, and we show its advantages under various alternative hypotheses through simulation studies and two real data applications.

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