Winston Wei Dou

Macro-Finance Decoupling: Robust Evaluations of Macro Asset Pricing Models

Joint with Xu Cheng, Zhipeng Liao

Econometrica Revise and Resubmit, May 2020

This paper shows that robust inference under weak identification is important to the evaluation of many influential macro asset pricing models, including long-run risk models, disaster risk models, and multifactor linear asset pricing models. Building on recent developments in the conditional inference literature, we provide a new specification test by simulating the critical value conditional on a sufficient statistic. This sufficient statistic can be intuitively interpreted as a measure capturing the macroeconomic information decoupled from the underlying content of asset pricing theories. Macro-finance decoupling is an effective way to improve the power of our specification test when asset pricing theories are difficult to refute due to an imbalance in the information content about the key model parameters between macroeconomic moment restrictions and asset pricing cross-equation restrictions.