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A New Approach Based on Cumulants for Estimating Financial Regression Models with Errors in the Variables: the Fama and French Model Revisited

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  • Alain Coen

    ()
    (Département de stratégie des affaires, Université du Québec (Montréal))

  • Francois-Éric Racicot

    ()
    (Département des sciences administratives, Université du Québec (Outaouais) et LRSP)

Abstract

This paper proposes to revisit both the CAPM and the three-factor model of Fama and French (1993) in presence of errors in the variables. To reduce the bias induced by measurement and specification errors, we transpose to the cost of equity an estimator based on cumulants of order three and four initially developed by Dagenais and Dagenais (1997) and lated generalized to financial models by Racicot (2003). Our results show that our technique has great and significant consequences on the measure of the cost of equity. We obtain ipso facto a new estimator of the Jensen alpha.

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File URL: http://www.repad.org/ca/qc/uq/uqo/dsa/fr200605.pdf
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Bibliographic Info

Paper provided by Département des sciences administratives, UQO in its series RePAd Working Paper Series with number UQO-DSA-wp142006.

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Length: 15 pages
Date of creation: 01 May 2006
Date of revision:
Handle: RePEc:pqs:wpaper:142006

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Keywords: Errors in the variables; cumulants; higher moments; instrumental variables; cost of equity; Jensen alpha.;

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  1. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
  2. Dagenais, Marcel G., 1994. "Parameter estimation in regression models with errors in the variables and autocorrelated disturbances," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 145-163.
  3. Aigner, Dennis J. & Hsiao, Cheng & Kapteyn, Arie & Wansbeek, Tom, 1984. "Latent variable models in econometrics," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 23, pages 1321-1393 Elsevier.
  4. Pal, Manoranjan, 1980. "Consistent moment estimators of regression coefficients in the presence of errors in variables," Journal of Econometrics, Elsevier, vol. 14(3), pages 349-364, December.
  5. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119, October.
  6. Kothari, S P & Shanken, Jay & Sloan, Richard G, 1995. " Another Look at the Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 185-224, March.
  7. Dagenais, Marcel G. & Dagenais, Denyse L., 1997. "Higher moment estimators for linear regression models with errors in the variables," Journal of Econometrics, Elsevier, vol. 76(1-2), pages 193-221.
  8. Klepper, Steven & Leamer, Edward E, 1984. "Consistent Sets of Estimates for Regressions with Errors in All Variables," Econometrica, Econometric Society, vol. 52(1), pages 163-83, January.
  9. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
  10. Francois-Éric Racicot & Raymond Théoret & Alain Coen, 2006. "Towards New Empirical Versions of Financial and Accounting Models Corrected for Measurement Errors," RePAd Working Paper Series UQO-DSA-wp132006, Département des sciences administratives, UQO.
  11. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
  12. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
  13. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
  14. MacKinnon, James G, 1992. "Model Specification Tests and Artificial Regressions," Journal of Economic Literature, American Economic Association, vol. 30(1), pages 102-46, March.
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