A New Approach Based on Cumulants for Estimating Financial Regression Models with Errors in the Variables: the Fama and French Model Revisited

Alain Coen () and François-Éric Racicot ()
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Alain Coen: Département de stratégie des affaires, Université du Québec (Montréal)

No UQO-DSA-wp142006, RePAd Working Paper Series from Département des sciences administratives, UQO

Abstract: 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.

Keywords: Errors in the variables; cumulants; higher moments; instrumental variables; cost of equity; Jensen alpha. (search for similar items in EconPapers)
JEL-codes: C13 C49 G12 G31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-ecm, nep-ets, nep-fin and nep-fmk
Date: 2006-05-01

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Persistent link: http://EconPapers.repec.org/RePEc:pqs:wpaper:142006

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