Pricing Model Performance and the Two‐Pass Cross‐Sectional Regression Methodology

Raymond Kan, Cesare Robotti and Jay Shanken ()

Journal of Finance, 2013, vol. 68, issue 6, 2617-2649

Abstract: Over the years, many asset pricing studies have employed the sample cross‐sectional regression (CSR) R2 as a measure of model performance. We derive the asymptotic distribution of this statistic and develop associated model comparison tests, taking into account the impact of model misspecification on the variability of the CSR estimates. We encounter several examples of large R2 differences that are not statistically significant. A version of the intertemporal capital asset pricing model (CAPM) exhibits the best overall performance, followed by the Fama–French three‐factor model. Interestingly, the performance of prominent consumption CAPMs is sensitive to variations in experimental design.

Date: 2013
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Citations: View citations in EconPapers (123)

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https://doi.org/10.1111/jofi.12035

Related works:
Working Paper: Pricing model performance and the two-pass cross-sectional regression methodology (2009)
Working Paper: Pricing Model Performance and the Two-Pass Cross-Sectional Regression Methodology (2009)
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