Inference in asset pricing models with a low-variance factor
AbstractThis paper concerns with the effects of including a low-variance factor in an asset pricing model. When a low-variance factor is present, the commonly applied Fama–MacBeth two-pass regression procedure is very likely to yield misleading results. Local asymptotic analysis and simulation evidence indicate that the risk premiums corresponding to all factors are very likely to be unreliably estimated. Moreover, t- and F-statistics are less likely to detect whether the risk premiums are significantly different from zero. We recommend Kleibergen’s (2009)FAR statistic when there is a low-variance factor included in an asset pricing model.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Banking & Finance.
Volume (Year): 37 (2013)
Issue (Month): 3 ()
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Low-variance factor; Local asymptotics; Fama–MacBeth method;
Find related papers by JEL classification:
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
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