Identification and inference in two-pass asset pricing models

Lynda Khalaf and Huntley Schaller

Journal of Economic Dynamics and Control, 2016, vol. 70, issue C, 165-177

Abstract: We introduce a framework that robustifies two-pass Fama–MacBeth regressions, in the sense that confidence regions for the ex post price of risk can be derived reliably even with weak identification. This region can be unbounded, if risk price is hard to identify, empty, if the model lacks fit, and bounded otherwise. Our framework thus provides automatic weak-identification and lack-of-fit warnings, and informative model rejections. Empirically relevant simulations document attractive size and power properties. Empirical applications with well known models and data sets illustrate practical usefulness and the potential value of additional cross-sectional information.

Keywords: Cross-sectional asset pricing inference; Fama–MacBeth; Weak identification; Reduced rank beta; CAPM; Fama–French factors (search for similar items in EconPapers)
JEL-codes: C12 C13 G12 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:70:y:2016:i:c:p:165-177

DOI: 10.1016/j.jedc.2016.07.002

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