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Estimating and Testing Beta Pricing Models: Alternative Methods and their Performance in Simulations

  • Jay Shanken
  • Guofu Zhou

In this paper, we conduct a simulation analysis of the Fama and MacBeth (1973) two-pass procedure, as well as maximum likelihood (ML) and generalized method of moments estimators of cross-sectional expected return models. We also provide some new analytical results on computational issues, the relations between estimators, and asymptotic distributions under model misspecification. The GLS estimator is often much more precise than the usual OLS estimator, but it displays more bias as well. A "truncated" form of ML performs quite well overall in terms of bias and precision, but produces less reliable inferences than the OLS estimator.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12055.

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Date of creation: Feb 2006
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Publication status: published as Shanken, Jay and Guofu Zhou. “Estimating and Testing Beta Pricing Models: Alternative Methods and Their Performance in Simulations.” Journal of Financial Economics 84, 1 (April 2007): 40-86.
Handle: RePEc:nbr:nberwo:12055
Note: AP
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