Abstract: 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. Thus, although the standard value factor is redundant, a version that incorporates more timely price information is not.
Bio: Jay Shanken is the Goizueta Chair in Finance at the Goizueta Business School of Emory University. He has a M.A. in mathematics from Cornell University and received his Ph.D. in economics from Carnegie-Mellon University. His research interests include the theory and testing of asset-pricing models and market efficiency, the predictability of stock returns and portfolio analysis. Professor Shanken has published numerous articles on these subjects in leading finance journals. He was a Batterymarch Fellow, received the Review of Financial Studies best paper of the year prize, the Financial Analysts Journal’s Graham & Dodd Scroll Award, and the Roger F. Murray Prize of the Institute for Quantitative Research in Finance. He is currently an associate editor for the Journal of Financial Economics and has been an associate editor for the Journal of Finance, the Review of Financial Studies, and the Financial Analysts Journal.
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