A New Approach Based on Cumulants for Estimating Financial Regression Models with Errors in the Variables: the Fama and French Model Revisited
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.
|Date of creation:||01 May 2006|
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- Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
- Francois-Éric Racicot, 2000. "Estimation et tests en présence d'erreurs de mesure sur les variables explicatives : vérification empirique par la méthode de simulation Monte Carlo," RePAd Working Paper Series UQO-DSA-wp022008, Département des sciences administratives, UQO.
- Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119, April.
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- 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.
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- Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
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- 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.
- 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.
- 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.
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