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Dealing with Factor Mismeasurement

Author

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  • Lee, Woongki

    (Yonsei University)

Abstract

Empirical implementation of asset pricing models faces a fundamental constraint. The true pricing factors implied by theory are unobservable, so researchers must rely on observable empirical factors. Because these factors are only proxies, they may contain measurement errors that distort estimated factor exposures, risk premia, and assessments of model performance. This study examines factor measurement errors and develops a methodology for assessing their empirical consequences. The methodology allows researchers to evaluate the reliability of asset pricing tests more carefully and draw more credible conclusions from empirical evidence.

Suggested Citation

  • Lee, Woongki, 2026. "Dealing with Factor Mismeasurement," SocArXiv p2tb8_v1, Center for Open Science.
    • Handle: RePEc:osf:socarx:p2tb8_v1
    DOI: 10.31235/osf.io/p2tb8_v1
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    References listed on IDEAS

    as
    1. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
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    3. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    4. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
    5. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    Full references (including those not matched with items on IDEAS)

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