A Cross-sectional Asset Pricing Test with More Power: An Instrumental Variable Approach

Jungshik Hur

Chapter 108 in Handbook of Investment Analysis, Portfolio Management, and Financial Derivatives:In 4 Volumes, 2024, pp 3547-3581 from World Scientific Publishing Co. Pte. Ltd.

Abstract: I find that downward bias of the estimated coefficient of betas in the Fama-MacBeth cross-sectional regression is caused by endogeneity of the estimated betas due to measurement errors. I propose an instrumental variable methodology that purges the endogeneity. The purged betas have a 95% correlation with the original betas and retain the relation with firm size. I document that controlling for the purged betas in the Fama-MacBeth cross-sectional regression has higher statistical power to correctly reject the null hypothesis of nonexistence of size premium and also has higher R-squared and higher total sum of squares than the Brennan-Chordia-Subrahmanyam (1998) methodology.

Keywords: Financial Accounting; Financial Auditing; Mutual Funds; Hedge Funds; Asset Pricing; Options; Portfolio Analysis; Risk Management; Investment Analysis; Momentum Analysis; Behavior Analysis; Futures; Index Futures; CDCs; Financial Econometrics; Statistics; Financial Derivatives; Financial Accounting (search for similar items in EconPapers)
JEL-codes: G1 G11 G12 G3 M41 M42 (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.worldscientific.com/doi/pdf/10.1142/9789811269943_0108 (application/pdf)
https://www.worldscientific.com/doi/abs/10.1142/9789811269943_0108 (text/html)
Ebook Access is available upon purchase.

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:wsi:wschap:9789811269943_0108

Ordering information: This item can be ordered from

Access Statistics for this chapter

More chapters in World Scientific Book Chapters from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().