Testing Alpha in High Dimensional Linear Factor Pricing Models with Dependent Observations

2024/01/25 by Ma, Huifang, Feng, Long, Wang, Zhaojun +1
#FOS: Computer and information sciences #Methodology (stat.ME)

paper · doi:10.48550/arxiv.2401.14052

Abstract

In this study, we introduce three distinct testing methods for testing alpha in high dimensional linear factor pricing model that deals with dependent data. The first method is a sum-type test procedure, which exhibits high performance when dealing with dense alternatives. The second method is a max-type test procedure, which is particularly effective for sparse alternatives. For a broader range of alternatives, we suggest a Cauchy combination test procedure. This is predicated on the asymptotic independence of the sum-type and max-type test statistics. Both simulation studies and practical data application demonstrate the effectiveness of our proposed methods when handling dependent observations.

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