add tests of sdf coefficients

tests/testthat/test-sdf_coefficients.R

@@ -0,0 +1,76 @@
+test_that("Test SDF coefficients", {
+
+  factors = factors[,-1]
+  returns = returns[,-1]
+
+  n_factors = ncol(factors)
+  n_returns = ncol(returns)
+
+  # Calculating factor loadings using Fama-MacBeth procedure.
+  covariance_returns_factors = stats::cov(returns, factors)
+  variance_returns = stats::cov(returns)
+  mean_returns = matrix(colMeans(returns), n_returns, 1)
+
+  # Computing SDF coefficients using the standard Fama-MacBeth approach.
+  fm_coeff = solve(
+    t(covariance_returns_factors) %*% covariance_returns_factors,
+    t(covariance_returns_factors) %*% mean_returns
+  )
+
+  # Calculating SDF coefficients using the Gospodinov-Kan-Robotti approach.
+  var_ret_inv_cov_ret_fac = solve(variance_returns, covariance_returns_factors)
+  gkr_coeff = solve(
+    t(var_ret_inv_cov_ret_fac) %*% covariance_returns_factors,
+    t(var_ret_inv_cov_ret_fac) %*% mean_returns
+  )
+
+  # Testing basic functionality of FRP without errors.
+  expect_no_error(SDFCoefficients(returns, factors))
+
+  # Testing SDFCoefficients with standard errors included.
+  expect_no_error(SDFCoefficients(returns, factors, include_standard_errors = TRUE))
+
+  # Test if prewhite works
+  expect_no_error(SDFCoefficients(returns, factors, include_standard_errors = TRUE, hac_prewhite = TRUE))
+
+  # Testing SDFCoefficients without misspecification robustness but including standard errors.
+  expect_no_error(SDFCoefficients(returns, factors, misspecification_robust = FALSE, include_standard_errors = TRUE))
+
+  # Testing GKR factor screening with misspecification_robust
+  expect_no_error(SDFCoefficients(returns, factors, misspecification_robust = TRUE, target_level_gkr2014_screening = 0.05))
+  expect_no_error(SDFCoefficients(returns, factors, misspecification_robust = TRUE, target_level_gkr2014_screening = 0.95))
+  expect_no_error(SDFCoefficients(returns, factors, misspecification_robust = TRUE, target_level_gkr2014_screening = 0.05))
+
+  # Testing error handling for incorrect dimensions (transposed matrices).
+  expect_error(SDFCoefficients(t(returns), factors, include_standard_errors = TRUE))
+  expect_error(SDFCoefficients(returns, t(factors), include_standard_errors = TRUE))
+  expect_error(SDFCoefficients(t(returns), t(factors), include_standard_errors = TRUE))
+
+  # Testing errors for wrong input types
+  expect_error(SDFCoefficients(c(), factors, include_standard_errors = TRUE))
+  expect_error(SDFCoefficients(returns, c(), include_standard_errors = TRUE, hac_prewhite = "c"))
+  expect_error(SDFCoefficients(returns, factors, include_standard_errors = "c"))
+  expect_error(SDFCoefficients(returns, factors, include_standard_errors = TRUE, hac_prewhite = "c"))
+
+  # Test if the function correctly throws an error when 'returns' has fewer rows than 'factors'.
+  expect_error(SDFCoefficients(returns[1:(nrow(returns)-5),], factors))
+
+  # Test if the function correctly throws an error when 'factors' has fewer rows than 'returns'.
+  expect_error(SDFCoefficients(returns, factors[1:(nrow(factors)-5),]))
+
+  # Getting results from FRP for further validations.
+  gkr_sdf_coefficients = SDFCoefficients(returns, factors, include_standard_errors = TRUE)
+  fm_sdf_coefficients = SDFCoefficients(returns, factors, misspecification_robust = FALSE, include_standard_errors = TRUE)
+
+  # Validating the length of the risk premia and standard errors vectors.
+  expect_length(fm_sdf_coefficients$sdf_coefficients, n_factors)
+  expect_length(fm_sdf_coefficients$standard_errors, n_factors)
+
+  expect_length(gkr_sdf_coefficients$sdf_coefficients, n_factors)
+  expect_length(gkr_sdf_coefficients$standard_errors, n_factors)
+
+  # Comparing computed risk premia with the expected values from manual calculations.
+  expect_equal(fm_sdf_coefficients$sdf_coefficients, unname(fm_coeff))
+  expect_equal(gkr_sdf_coefficients$sdf_coefficients, unname(gkr_coeff))
+
+})