Journal
JOURNAL OF BUSINESS & ECONOMIC STATISTICS
Volume -, Issue -, Pages -Publisher
TAYLOR & FRANCIS INC
DOI: 10.1080/07350015.2021.2011736
Keywords
Characteristics-based; Peer groups; Power-enhanced test; Semiparametric
Funding
- Fundamental Research Funds for the Central Universities
- School of Economics, Peking University
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We propose an asset pricing factor model that utilizes semiparametric characteristics and factor loading functions. The unknown functions are approximated using B-splines sieve, and the model is estimated and tested using a power enhanced hypothesis test. The study also investigates the structure of mispricing components through Hierarchical K-means Clusterings.
We propose an asset pricing factor model constructed with semiparametric characteristics-based mispricing and factor loading functions. We approximate the unknown functions by B-splines sieve where the number of B-splines coefficients is diverging. We estimate this model and test the existence of the mispricing function by a power enhanced hypothesis test. The enhanced test solves the low power problem caused by diverging B-splines coefficients, with the strengthened power approaching one asymptotically. We also investigate the structure of mispricing components through Hierarchical K-means Clusterings. We apply our methodology to CRSP (Center for Research in Security Prices) and Compustat data for the U.S. stock market with one-year rolling windows during 1967-2017. This empirical study shows the presence of mispricing functions in certain time blocks. We also find that distinct clusters of the same characteristics lead to similar arbitrage returns, forming a peer group of arbitrage characteristics.
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