A Skeptical Appraisal of Asset-Pricing Tests

Jonathan Lewellen, Stefan Nagel and Jay Shanken

No 12360, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: It has become standard practice in the cross-sectional asset-pricing literature to evaluate models based on how well they explain average returns on size- and B/M-sorted portfolios, something many models seem to do remarkably well. In this paper, we review and critique the empirical methods used in the literature. We argue that asset-pricing tests are often highly misleading, in the sense that apparently strong explanatory power (high cross-sectional R2s and small pricing errors) in fact provides quite weak support for a model. We offer a number of suggestions for improving empirical tests and evidence that several proposed models don't work as well as originally advertised.

JEL-codes: G12 (search for similar items in EconPapers)
Date: 2006-07
New Economics Papers: this item is included in nep-cfn, nep-ecm, nep-fin and nep-fmk
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

Published as Lewellen, Jonathan & Nagel, Stefan & Shanken, Jay, 2010. "A skeptical appraisal of asset pricing tests," Journal of Financial Economics, Elsevier, vol. 96(2), pages 175-194, May.

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Journal Article: A skeptical appraisal of asset pricing tests (2010)
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