IterativeKleibergenPaap2006BetaRankTest {intrinsicFRP}

Asset Pricing Model Identification via Iterative Kleibergen-Paap 2006 Beta Rank Test

Description

Evaluates the rank of regression loadings in an asset pricing model using the iterative Kleibergen-Paap (2006) doi:10.1016/j.jeconom.2005.02.011 beta rank test. It systematically tests the null hypothesis for each potential rank ⁠q = 0, ..., n_factors - 1⁠ and estimates the rank as the smallest q that has a p-value below the significance level, adjusted for the number of factors. The function presupposes more returns than factors (n_factors < n_returns). All the details can be found in Kleibergen-Paap (2006) doi:10.1016/j.jeconom.2005.02.011.

Usage

IterativeKleibergenPaap2006BetaRankTest(
  returns,
  factors,
  target_level = 0.05,
  check_arguments = TRUE
)

Arguments

returns

A matrix of test asset excess returns with dimensions ⁠n_observations x n_returns⁠.

factors

A matrix of risk factors with dimensions ⁠n_observations x n_factors⁠.

target_level

A numeric value specifying the significance level for the test. For each hypothesis test H: rank(beta) = q, the significance level is adjusted to target_level / n_factors. The default is 0.05.

check_arguments

Logical flag indicating whether to perform internal checks of the function's arguments. Defaults to TRUE.

Value

A list containing estimates of the regression loading rank and the associated iterative Kleibergen-Paap 2006 beta rank statistics and p-values for each q.

Examples

# import package data on 15 risk factors and 42 test asset excess returns
factors = intrinsicFRP::factors[,-1]
returns = intrinsicFRP::returns[,-1]

# compute the model identification test
hj_test = ChenFang2019BetaRankTest(returns, factors)