Details
| Original language | English |
|---|---|
| Article number | 106626 |
| Journal | Journal of Banking and Finance |
| Volume | 145 |
| Early online date | 5 Sept 2022 |
| Publication status | Published - Dec 2022 |
Abstract
The standard full-sample time-series asset pricing test suffers from poor statistical properties, look-ahead bias, constant-beta assumptions, and rejects models when average factor returns deviate from risk premia. We therefore confront prominent equity pricing models with the classical Fama and MacBeth (1973) cross-sectional test. For all models, we uncover three main findings: (i) the intercept coefficients are economically large and highly statistically significant; (ii) cross-sectional factor risk premium estimates are generally far below the average factor excess returns; and (iii) they are usually not statistically significant. Overall, all new factor models are inconsistent with no-arbitrage pricing and cannot accurately explain the cross-section of stock returns.
Keywords
- Factor models, beta estimation, cross-sectional tests, no-arbitrage pricing
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)
- Finance
- Economics, Econometrics and Finance(all)
- Economics and Econometrics
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In: Journal of Banking and Finance, Vol. 145, 106626, 12.2022.
Research output: Contribution to journal › Article › Research › peer review
}
TY - JOUR
T1 - Testing Factor Models in the Cross-Section
AU - Hollstein, Fabian
AU - Prokopczuk, Marcel
PY - 2022/12
Y1 - 2022/12
N2 - The standard full-sample time-series asset pricing test suffers from poor statistical properties, look-ahead bias, constant-beta assumptions, and rejects models when average factor returns deviate from risk premia. We therefore confront prominent equity pricing models with the classical Fama and MacBeth (1973) cross-sectional test. For all models, we uncover three main findings: (i) the intercept coefficients are economically large and highly statistically significant; (ii) cross-sectional factor risk premium estimates are generally far below the average factor excess returns; and (iii) they are usually not statistically significant. Overall, all new factor models are inconsistent with no-arbitrage pricing and cannot accurately explain the cross-section of stock returns.
AB - The standard full-sample time-series asset pricing test suffers from poor statistical properties, look-ahead bias, constant-beta assumptions, and rejects models when average factor returns deviate from risk premia. We therefore confront prominent equity pricing models with the classical Fama and MacBeth (1973) cross-sectional test. For all models, we uncover three main findings: (i) the intercept coefficients are economically large and highly statistically significant; (ii) cross-sectional factor risk premium estimates are generally far below the average factor excess returns; and (iii) they are usually not statistically significant. Overall, all new factor models are inconsistent with no-arbitrage pricing and cannot accurately explain the cross-section of stock returns.
KW - Factor models
KW - beta estimation
KW - cross-sectional tests
KW - no-arbitrage pricing
UR - http://www.scopus.com/inward/record.url?scp=85137294120&partnerID=8YFLogxK
U2 - 10.1016/j.jbankfin.2022.106626
DO - 10.1016/j.jbankfin.2022.106626
M3 - Article
VL - 145
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
SN - 0378-4266
M1 - 106626
ER -