Cross-sectional tests of asset pricing models with full-rank mimicking portfolios

Jinyong Kim, Kun Ho Kim, Jeong Hwan Lee

Research output: Contribution to journalArticlepeer-review


In the standard tests of asset pricing models, factor risk premia are estimated on a test asset span so that models are tested with degrees of freedom reduced by the number of factors. Risk premia of traded factors can be further restricted to be equal to their expected returns, but such restrictions cannot be imposed on models with nontraded factors, which may create a problem of testing without full restrictions or on unequal asset spans across models. We propose a full-rank mimicking portfolio approach by projecting nontraded factors onto a combined span of test assets and benchmark traded factors. Under the Hansen-Jagannathan distance framework, we demonstrate that full-rank mimicking portfolios can provide improved power and fair performance comparison against a benchmark model in both specification and model comparison tests.

Original languageEnglish
Article number101453
JournalNorth American Journal of Economics and Finance
StatePublished - 2021 Jul


  • Benchmark span
  • Full-rank mimicking portfolios
  • Hansen-Jagannathan distance
  • Nontraded factors


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