EFFICIENCY GAINS IN BETA‐PRICING MODELS1

Bent Jesper Christensen

Mathematical Finance, 1994, vol. 4, issue 2, 143-154

Abstract: Recent literature shows that the risk premium is efficiently estimated in the usual two‐pass procedure, estimating betas in the unrestricted model, and then regressing returns on estimated betas. This paper shows that this is not so when allowing for factor unobservability. Imposing the financial theory restriction from the outset leads to a strictly positive efficiency gain in the risk premium estimation. In addition, the role of an associated efficiency gain in the beta estimation is studied in the context of a zero‐beta model.

Date: 1994
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https://doi.org/10.1111/j.1467-9965.1994.tb00054.x

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Persistent link: https://EconPapers.repec.org/RePEc:bla:mathfi:v:4:y:1994:i:2:p:143-154

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