Dealing with Factor Mismeasurement

Woongki Lee
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Woongki Lee: Yonsei University

No p2tb8_v1, SocArXiv from Center for Open Science

Abstract: Empirical implementation of asset pricing models faces a fundamental constraint. The true pricing factors implied by theory are unobservable, so researchers must rely on observable empirical factors. Because these factors are only proxies, they may contain measurement errors that distort estimated factor exposures, risk premia, and assessments of model performance. This study examines factor measurement errors and develops a methodology for assessing their empirical consequences. The methodology allows researchers to evaluate the reliability of asset pricing tests more carefully and draw more credible conclusions from empirical evidence.

Date: 2026-08-02
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Persistent link: https://EconPapers.repec.org/RePEc:osf:socarx:p2tb8_v1

DOI: 10.31219/osf.io/p2tb8_v1

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