An Answer to Roll’s Critique (1977) 45 Years Later

Marc Desban, Erkin Diyarbakirlioglu, Souad Lajili Jarjir () and Mehmet Hakan Satman
Additional contact information
Marc Desban: IRG
Erkin Diyarbakirlioglu: IRG
Souad Lajili Jarjir: CEREFIGE
Mehmet Hakan Satman: Istanbul University

A chapter in Essays on Financial Analytics, 2023, pp 297-341 from Springer

Abstract: 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. Based on intercepts, betas, adjusted R2, and the Gibbons et al. (1989) test, we find that the CGA-based method outperforms overall the OLS method. 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; Market portfolio; Time-series regressions; Ordinary-least squares (OLS); Errors-in-variables (EIV); GMM with instrumental variables; Compact genetic algorithms (CGAs) (search for similar items in EconPapers)
Date: 2023
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

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:spr:lnopch:978-3-031-29050-3_14

Ordering information: This item can be ordered from
http://www.springer.com/9783031290503

DOI: 10.1007/978-3-031-29050-3_14

Access Statistics for this chapter

More chapters in Lecture Notes in Operations Research from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().