Statistical Inferences with Specification Tests
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The author discusses the methodologies that are currently applied to empirical asset pricing models on asset returns, including up-to-date coverage on theoretical setting and model specification tests. For instance, factor analysis and (asymptotic) principal component analysis are provided for searching for these pricing cores or kernels of asset returns. Unfortunately, these earlier studies incur the difficulty of observability of these factors and of (economic) interpretation of the principal components. In essence, the application of multi-factor asset pricing models with observed/presumed factors becomes an alternative in the search for the systematic components of asset returns.
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