Asset pricing models with measurement error problems: A new framework with Compact Genetic Algorithms

Erkin Diyarbakirlioglu, Marc Desban () and Souad Lajili Jarjir ()
Additional contact information
Erkin Diyarbakirlioglu: IRG - Institut de Recherche en Gestion - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12 - Université Gustave Eiffel
Marc Desban: IRG - Institut de Recherche en Gestion - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12 - Université Gustave Eiffel
Souad Lajili Jarjir: IRG - Institut de Recherche en Gestion - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12 - Université Gustave Eiffel

Post-Print from HAL

Abstract: We implement a new framework to mitigate the errors-in-variables (EIV) problem in the estimation of asset pricing models. Considering an international data of portfolio stock returns from 1990 to 2021 widely used in empirical studies, we highlight the importance of the estimation method in time-series regressions. We compare the traditional Ordinary-Least Squares (OLS) method to an alternative estimator based on a Compact Genetic Algorithm (CGA) in the case of the CAPM, three-, and five-factor models. Based on intercepts, betas, adjusted R2 , and the Gibbons, Ross and Shanken (1989) test, we find that the CGA-based method outperforms overall the OLS for the three asset pricing models. In particular, we obtain less statistically significant intercepts, smoother R2 across different portfolios and lower GRS test statistics. Specifically, in line with Roll's critique (1977) on the unobservability of the market portfolio, we reduce the attenuation bias in market risk premium estimates. Moreover, our results are robust to alternative methods such as Instrumental Variables estimated with Generalized-Method of Moments (GMM). Our findings have several empirical and managerial implications related to the estimation of asset pricing models as well as their interpretation as a popular tool in terms of corporate financial decision-making.

Keywords: Asset pricing; CAPM; Fama-French three-and five-factor models; Market Portfolio; Time-series regressions; Ordinary-Least Squares (OLS); Errors-in-variables (EIV); GMM with Instrumental Variables; Compact Genetic Algorithms (CGA) (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-ecm and nep-fmk
Note: View the original document on HAL open archive server: https://hal.science/hal-03643083v1
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published in Finance, 2022, 43 (2), pp.1-78. ⟨10.3917/fina.432.0001⟩

Downloads: (external link)
https://hal.science/hal-03643083v1/document (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03643083

DOI: 10.3917/fina.432.0001

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().