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