Inference in asset pricing models with a low-variance factor

Hua (Helen) Shang ()

Journal of Banking & Finance, 2013, vol. 37, issue 3, 1046-1060

Abstract: This paper concerns with the effects of including a low-variance factor in an asset pricing model. When a low-variance factor is present, the commonly applied Fama–MacBeth two-pass regression procedure is very likely to yield misleading results. Local asymptotic analysis and simulation evidence indicate that the risk premiums corresponding to all factors are very likely to be unreliably estimated. Moreover, t- and F-statistics are less likely to detect whether the risk premiums are significantly different from zero. We recommend Kleibergen’s (2009)FAR statistic when there is a low-variance factor included in an asset pricing model.

Keywords: Low-variance factor; Local asymptotics; Fama–MacBeth method (search for similar items in EconPapers)
JEL-codes: C12 C13 G10 G12 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:3:p:1046-1060

DOI: 10.1016/j.jbankfin.2012.11.007

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