Evaluating alternative methods of asset pricing based on the overall magnitude of pricing errors

Qi Shi and Bin Li

Finance Research Letters, 2019, vol. 29, issue C, 125-128

Abstract: We are the first pioneers who evaluate the overall fitness of the two-pass Fama–MacBeth regression and the generalized method of moments (GMM) by comparing the R2 or mean absolute pricing error (MAE), using a Monte Carlo simulation of different models and portfolios for hundreds of trials and, in particular, focusing on the case that the expected return is always a gross return in both methods. Our findings reveal an innovative finding that both methodologies achieve approximate overall magnitudes of pricing errors.

Keywords: Fama–MacBeth regression; GMM; Pricing errors; Monte Carlo simulation (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:29:y:2019:i:c:p:125-128

DOI: 10.1016/j.frl.2019.03.005

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