Estimating Asset Pricing Models in the Presence of Cross-Sectionally Correlated Pricing Errors

In this study, we propose an adversarial learning approach to the asset pricing model estimation problem which aims to find estimates of factors and loadings that capture time-series covariations while minimizing the worst-case cross-sectional pricing errors. The proposed estimator is defined by a novel min-max optimization problem in which finding a solution is known to be difficult. This contrasts with other related estimators that admit a well-defined analytic solution but do not effectively account for correlations among the pricing errors. To this end, we propose an approximate algorithm based on the alternating optimization procedure and empirically demonstrate that our proposed adversarial estimation framework outperforms other existing factor models, especially when the explanatory power of the pricing model is limited.

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Publication Details

Journal
Mathematics
Published
2024-11-04
DOI
https://doi.org/10.3390/math12213442
Primary Topic
Financial Markets and Investment Strategies
Type
article
Field-Weighted Citation Impact
0.00

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article

Estimating Asset Pricing Models in the Presence of Cross-Sectionally Correlated Pricing Errors

Saejoon Kim, Hyuksoo Kim
Mathematics
Financial Markets and Investment Strategies
article

Estimating Asset Pricing Models in the Presence of Cross-Sectionally Correlated Pricing Errors

Saejoon Kim, Hyuksoo Kim
article en

Abstract

In this study, we propose an adversarial learning approach to the asset pricing model estimation problem which aims to find estimates of factors and loadings that capture time-series covariations while minimizing the worst-case cross-sectional pricing errors. The proposed estimator is defined by a novel min-max optimization problem in which finding a solution is known to be difficult. This contrasts with other related estimators that admit a well-defined analytic solution but do not effectively account for correlations among the pricing errors. To this end, we propose an approximate algorithm based on the alternating optimization procedure and empirically demonstrate that our proposed adversarial estimation framework outperforms other existing factor models, especially when the explanatory power of the pricing model is limited.

MathematicsVol. 12(21)
Sogang University (KR)
National Research Foundation, National Research Foundation of Korea, Ministry of Science and ICT, South Korea
Reduced inequalities
Openalex Percentile: Top 74%
Financial Markets and Investment Strategies
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