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On the estimation of asset pricing models using univariate betas. (English)
Econ. Lett. 110, No. 2, 117-121 (2011).
Summary: We derive asymptotic standard errors of risk premia estimates based on the popular two-pass cross-sectional regression methodology developed by Black, Jensen, and Scholes [“The capital asset pricing model: some empirical findings”, in: M. C. Jensen (ed.), Studies in the Theory of Capital Markets. Praeger, New York (1972)] and {\it E. Fama} and {\it J. MacBeth} [“Risk, return, and quilibrium: empirical tests”, J. Polit. Econ. 71, 607-636 (1973)] when univariate betas are used as regressors. Our standard errors are robust to model misspecification and allow for general distributional assumptions. In testing whether the beta risk of a given factor is priced, our misspecification robust standard error can lead to economically different conclusions from those based on the {\it R. Jagannathan} and {\it Z. Wang} [“An asymptotic theory for estimating beta-pricing models using cross-sectional regression”, J. Finance 53, 1285‒1309 (1998)] standard error which is derived under the correctly specified model.
Classification: 91B82 91G70 91B25 62P05
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