Misspecification and Weak Identification in Asset Pricing

Frank Kleibergen and Zhaoguo Zhan

Papers from arXiv.org

Abstract: The widespread co-existence of misspecification and weak identification in asset pricing has led to an overstated performance of risk factors. Because the conventional Fama and MacBeth (1973) methodology is jeopardized by misspecification and weak identification, we infer risk premia by using a double robust Lagrange multiplier test that remains reliable in the presence of these two empirically relevant issues. Moreover, we show how the identification, and the resulting appropriate interpretation, of the risk premia is governed by the relative magnitudes of the misspecification J-statistic and the identification IS-statistic. We revisit several prominent empirical applications and all specifications with one to six factors from the factor zoo of Feng, Giglio, and Xiu (2020) to emphasize the widespread occurrence of misspecification and weak identification.

Date: 2022-06
New Economics Papers: this item is included in nep-ecm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://arxiv.org/pdf/2206.13600 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2206.13600

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().