Estimating and testing beta pricing models: Alternative methods and their performance in simulations

Jay Shanken () and Guofu Zhou

No 275, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics

Abstract: We conduct a simulation analysis of the Fama and MacBeth[1973. Risk, returns and equilibrium: empirical tests. Journal of Political Economy 71, 607¨C636.] two-pass procedure, as well as maximum likelihood (ML) and generalized method of moments estimators of cross-sectional expected return models. We also provide some new analytical results on computational issues, the relations between estimators, and asymptotic distributions under model misspecification. The generalized least squares estimator is often much more precise than the usual ordinary least squares (OLS) estimator, but it displays more bias as well. A "truncated" form of ML performs quite well overall in terms of bias and precision, but produces less reliable inferences than the OLS estimator

Keywords: Cross-sectional regression; Fama-MacBeth; Specification test (search for similar items in EconPapers)
JEL-codes: C21 G12 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (115)

Published in Journal of Financial Economics, vol. 84(1), pages 40-86, April 2007

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Related works:
Journal Article: Estimating and testing beta pricing models: Alternative methods and their performance in simulations (2007)
Working Paper: Estimating and Testing Beta Pricing Models: Alternative Methods and their Performance in Simulations (2006)
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