A New Approach Based on Cumulants for Estimating Financial Regression Models with Errors in the Variables: the Fama and French Model Revisited
AbstractThis 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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Bibliographic InfoPaper provided by Département des sciences administratives, UQO in its series RePAd Working Paper Series with number UQO-DSA-wp142006.
Length: 15 pages
Date of creation: 01 May 2006
Date of revision:
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Errors in the variables; cumulants; higher moments; instrumental variables; cost of equity; Jensen alpha.;
Find related papers by JEL classification:
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C49 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Other
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-06-24 (All new papers)
- NEP-BEC-2006-06-24 (Business Economics)
- NEP-CFN-2006-06-24 (Corporate Finance)
- NEP-ECM-2006-06-24 (Econometrics)
- NEP-ETS-2006-06-24 (Econometric Time Series)
- NEP-FIN-2006-06-24 (Finance)
- NEP-FMK-2006-06-24 (Financial Markets)
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