The Errors in the Variables Problem in the Cross-Section of Expected Stock Returns
AbstractRecent research has documented the failure of market beta to capture the cross-section of expected returns within the context of a two-pass estimation methodology. However, the two-pass methodology suffers from the errors-in-variables (EIV) problem that could attenuate the apparent significance of market beta. This article provides a new correction for the EIV problem that is robust to conditional heteroscedasticity. After the correction, I find more support for the role of market beta and less support for the role of firm size in explaining the cross-section of expected returns. While the EIV correction leads to a diminished role of firm size, the size variable remains a significant force in explaining the cross-section of expected returns. Copyright 1995 by American Finance Association.
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Bibliographic InfoArticle provided by American Finance Association in its journal Journal of Finance.
Volume (Year): 50 (1995)
Issue (Month): 5 (December)
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