Macro-Finance Decoupling: Robust Evaluations of Macro Asset Pricing Models
Abstract/Contents
- Abstract
- This paper shows that robust inference under weak identification is important to the evaluation of many influential macro asset pricing models, including long-run risk models and (time-varying) rare-disaster risk models. Building on recent developments in the conditional inference literature, we provide a novel conditional specification test by simulating the critical value conditional on a sufficient statistic. This sufficient statistic can be intuitively interpreted as a measure capturing the macroeconomic information decoupled from the underlying content of asset pricing theories. Macro-finance decoupling is an effective way to improve the power of the specification test when asset pricing theories are difficult to refute because of a severe imbalance in the information content about the key model parameters between macroeconomic moment restrictions and asset pricing cross-equation restrictions. For empirical application, we apply the proposed conditional specification test to evaluate a time-varying rare-disaster risk model and construct data-driven robust model uncertainty sets.
Description
| Type of resource | text |
|---|---|
| Date created | July 29, 2021 |
Creators/Contributors
| Author | Cheng, Xu |
|---|---|
| Author | Dou, Winston Wei |
| Author | Liao, Zhipeng |
| Organizer of meeting | Judd, Kenneth |
| Organizer of meeting | Pohl, Walter |
| Organizer of meeting | Schmedders, Karl |
| Organizer of meeting | Wilms, Ole |
Subjects
| Subject | structural asset pricing |
|---|---|
| Subject | conditional inference |
| Subject | rare disasters |
| Subject | long-run risk |
| Subject | weak identification |
| Subject | model uncertainty |
| Genre | Text |
| Genre | Working paper |
| Genre | Grey literature |
Bibliographic information
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- License
- This work is licensed under a Creative Commons Attribution 4.0 International license (CC BY).
Preferred citation
- Preferred citation
- Cheng, X., Dou, W., and Liao, Z. (2022). Macro-Finance Decoupling: Robust Evaluations of Macro Asset Pricing Models. Stanford Digital Repository. Available at https://purl.stanford.edu/sq684mr4896
Collection
SITE Conference 2021
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