A simple test of misspecification for linear asset pricing models

Antoine Giannetti ()
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Antoine Giannetti: Florida Atlantic University

Financial Markets and Portfolio Management, 2024, vol. 38, issue 3, No 1, 305-330

Abstract: Abstract A fundamental implication of asset pricing theory is that investors must earn risk-premiums for bearing exposure to systematic risk. The two-pass cross-sectional regression is a popular approach for risk-premium estimation. The empirical literature has found that this approach often delivers estimates that significantly differ from their time-series counterparts. The paper explores a test of model misspecification that exploits the difference between cross-sectional and time-series risk-premium estimates. The suggested approach complements traditional misspecification tests and may be applied as an alternative to the deployment of misspecification-robust standard errors to test risk-premium significance.

Keywords: Asset pricing; Risk-premium; Model misspecification; Simulations (search for similar items in EconPapers)
JEL-codes: C1 C18 G1 G12 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11408-024-00445-6

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