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arXiv · 2307.09397

Adaptive Testing for Alphas in Conditional Factor Models with High Dimensional Assets

Huifang MA·Long Feng·Zhaojun Wang
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Abstract

This paper focuses on testing for the presence of alpha in time-varying factor pricing models, specifically when the number of securities N is larger than the time dimension of the return series T. We introduce a maximum-type test that performs well in scenarios where the alternative hypothesis is sparse. We establish the limit null distribution of the proposed maximum-type test statistic and demonstrate its asymptotic independence from the sum-type test statistics proposed by Ma et al.(2020).Additionally, we propose an adaptive test by combining the maximum-type test and sum-type test, and we show its advantages under various alternative hypotheses through simulation studies and two real data applications.

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Huifang MA, Long Feng, Zhaojun Wang. 2023-07-18. Adaptive Testing for Alphas in Conditional Factor Models with High Dimensional Assets. https://arxiv.org/abs/2307.09397

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