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Relative Entropy and Minimum-Variance Pricing Kernel in Asset Pricing Model Evaluation.

ABSTRACT: Recent literature shows that many testing procedures used to evaluate asset pricing models result in spurious rejection probabilities. Model misspecification, the strong factor structure of test assets, or skewed test statistics largely explain this. In this paper we use the relative entropy of pricing kernels to provide an alternative framework for testing asset pricing models. Building on the fact that the law of one price guarantees the existence of a valid pricing kernel, we study the relationship between the mean-variance efficiency of a model's factor-mimicking portfolio, as measured by the cross-sectional generalized least squares (GLS) R 2 statistic, and the relative entropy of the pricing kernel, as determined by the Kullback-Leibler divergence. In this regard, we suggest an entropy-based decomposition that accurately captures the divergence between the factor-mimicking portfolio and the minimum-variance pricing kernel resulting from the Hansen-Jagannathan bound. Our results show that, although GLS R 2 statistics and relative entropy are strongly correlated, the relative entropy approach allows us to explicitly decompose the explanatory power of the model into two components, namely, the relative entropy of the pricing kernel and that corresponding to its correlation with asset returns. This makes the relative entropy a versatile tool for designing robust tests in asset pricing.

SUBMITTER: Rojo-Suarez J

PROVIDER: S-EPMC7517259 | biostudies-literature | 2020 Jun

REPOSITORIES: biostudies-literature

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Relative Entropy and Minimum-Variance Pricing Kernel in Asset Pricing Model Evaluation.

Rojo-Suárez Javier J Alonso-Conde Ana Belén AB

Entropy (Basel, Switzerland) 20200630 7

Recent literature shows that many testing procedures used to evaluate asset pricing models result in spurious rejection probabilities. Model misspecification, the strong factor structure of test assets, or skewed test statistics largely explain this. In this paper we use the relative entropy of pricing kernels to provide an alternative framework for testing asset pricing models. Building on the fact that the law of one price guarantees the existence of a valid pricing kernel, we study the relati ...[more]

PMID: 33286493

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Project description:BackgroundMany treatments are being assessed for repurposing to treat coronavirus disease 2019 (COVID-19). One drug that has shown promising results in vitro is nitazoxanide. Unlike other postulated drugs, nitazoxanide shows a high ratio of maximum plasma concentration (Cmax), after 1 day of 500?mg twice daily (BD), to the concentration required to inhibit 50% replication (EC50) of severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2) (Cmax: EC50roughly equal to 14:1). As such, it is important to investigate the safety of nitazoxanide for further trials. Furthermore, treatments for COVID-19 should be cheap to promote global access, but prices of many drugs are far higher than the costs of production. We aimed to conduct a review of the safety of nitazoxanide for any prior indication and calculate its minimum costs of production.MethodsA review of nitazoxanide clinical research was conducted using EMBASE and MEDLINE databases, supplemented by ClinicalTrials.gov. We searched for phase 2 or 3 randomised controlled trials (RCTs) comparing nitazoxanide with placebo or active control for 5–14 days in participants experiencing acute infections of any kind. Data extracted were grade 1–4 and serious adverse events (AEs). Data were also extracted on gastrointestinal (GI) AEs, as well as hepatorenal and cardiovascular effects.Active pharmaceutical ingredient cost data from 2016 to 2019 were extracted from the Panjiva database and adjusted for 5% loss during production, costs of excipients, formulation, a 10% profit margin and tax. Two dosages, at 500?mg BD and a higher dose of 1100?mg three times daily (TDS), were considered. Our estimated costs were compared with publicly available list prices from a selection of countries.ResultsNine RCTs of nitazoxanide were identified for inclusion. These RCTs accounted for 1514 participants and an estimated 95.3 person-years-of-follow-up. No significant differences were found in any of the AE endpoints assessed, across all trials or on subgroup analyses of active- or placebo-controlled trials. Mild GI AEs increased with dose. No hepatorenal or cardiovascular concerns were raised, but few appropriate metrics were reported. There were no teratogenic concerns, but the evidence base was very limited.Based on a weighted-mean cost of US $61/kg, a 14-day course of treatment with nitazoxanide 500?mg BD would cost $1.41. The daily cost would therefore be $0.10. The same 14-day course could cost $3944 in US commercial pharmacies, and $3 per course in Pakistan, India and Bangladesh. At a higher dose of 1100?mg TDS, our estimated cost was $4.08 per 14-day course, equivalent to $0.29 per day.ConclusionNitazoxanide demonstrates a good safety profile at approved doses. However, further evidence is required regarding hepatorenal and cardiovascular effects, as well as teratogenicity. We estimate that it would be possible to manufacture nitazoxanide as generic for $1.41 for a 14-day treatment course at 500?mg BD, up to $4.08 at 1100?mg TDS. Further trials in COVID-19 patients should be initiated. If efficacy against SARS-CoV-2 is demonstrated in clinical studies, nitazoxanide may represent a safe and affordable treatment in the ongoing pandemic.

Dataset Information

Relative Entropy and Minimum-Variance Pricing Kernel in Asset Pricing Model Evaluation.

Publications

Relative Entropy and Minimum-Variance Pricing Kernel in Asset Pricing Model Evaluation.

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