2023/04/13 by Xia, Qiang, Zhang, Xianyang
#FOS: Computer and information sciences #Methodology (stat.ME)
paper · doi:10.48550/arxiv.2304.06585
This paper proposes a new procedure to validate the multi-factor pricing theory by testing the presence of alpha in linear factor pricing models with a large number of assets. Because the market's inefficient pricing is likely to occur to a small fraction of exceptional assets, we develop a testing procedure that is particularly powerful against sparse signals. Based on the high-dimensional Gaussian approximation theory, we propose a simulation-based approach to approximate the limiting null distribution of the test. Our numerical studies show that the new procedure can deliver a reasonable size and achieve substantial power improvement compared to the existing tests under sparse alternatives, and especially for weak signals.