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Robust Inference for Consumption-Based Asset Pricing with Power

Tim Alexander Kroencke

Critical Finance Review2025https://doi.org/10.1561/104.00000154article
AJG 1ABDC A*
Weight
0.46

Abstract

Kleibergen and Zhan (2020) propose a new approach to test consumption-based asset pricing models that is robust to the “useless” factor problem, i.e., concluding too often that a factor is priced when the factor is actually uncorrelated with the test assets and is not priced. I show that even when factor correlation is economically large and significant (think of 0.40 and larger), their testing approach lacks power in small samples to detect sufficient factor correlation or to find that a factor is priced. I propose simple remedies that help to achieve robust and powerful asset pricing tests.

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https://doi.org/https://doi.org/10.1561/104.00000154

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@article{tim2025,
  title        = {{Robust Inference for Consumption-Based Asset Pricing with Power}},
  author       = {Tim Alexander Kroencke},
  journal      = {Critical Finance Review},
  year         = {2025},
  doi          = {https://doi.org/https://doi.org/10.1561/104.00000154},
}

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Robust Inference for Consumption-Based Asset Pricing with Power

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Evidence weight

0.46

Balanced mode · F 0.40 / M 0.15 / V 0.05 / R 0.40

F · citation impact0.37 × 0.4 = 0.15
M · momentum0.57 × 0.15 = 0.09
V · venue signal0.50 × 0.05 = 0.03
R · text relevance †0.50 × 0.4 = 0.20

† Text relevance is estimated at 0.50 on the detail page — for your query’s actual relevance score, open this paper from a search result.