Speaker: Svetlana Bryzgalova, Stanford
Title: Spurious Factors in Linear Asset Pricing Models
Abstract: When a risk factor has small covariance with asset returns, risk premia in the linear asset pricing models are no longer identified. Weak factors, similar to weak instruments, make the usual estimation techniques unreliable. When included in the model, they generate spuriously high significance levels of their own risk premia estimates, overall measures of fit and may crowd out the impact of the true sources of risk. I develop a new approach to the estimation of cross-sectional asset pricing models that: a) provides simultaneous model diagnostics and parameter estimates; b) automatically removes the effect of spurious factors; c) restores consistency and asymptotic normality of the parameter estimates, as well as the accuracy of standard measures of fit; d) performs well in both small and large samples. I provide new insights on the pricing ability of various factors proposed in the literature. In particular, I identify a set of robust factors (e.g. Fama-French ones, but not only), and those that suffer from severe identification problems that render the standard assessment of their pricing performance unreliable (e.g. consumption growth, human capital proxies and others).
Bio: Svetlana Bryzgalova is an Assistant Professor of Finance at the Stanford Graduate School of Business. She joined the GSB in September 2015 after receiving her PhD and MRes degrees in Economics from London School of Economics. Prior to attending LSE, Professor Bryzgalova graduated summa cum laude with a MSc in Financial Economics and BA in Economics (Mathematics) from the Higher School of Economics (Russia).
Kapil K Jain
Thursday, May 26, 2016 -
4:30pm to 5:30pm