On the Estimation of Asset Pricing Models Using Univariate Betas
12 Pages Posted: 22 Jan 2009 Last revised: 25 Jul 2010
Date Written: March 17, 2009
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 (1972) and Fama and MacBeth (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 Jagannathan and Wang (1998) standard error which is derived under the correctly specified model.
Keywords: Asset Pricing Models, Cross-Sectional Regressions, Simple Regression Betas, Model Misspecification
JEL Classification: G12
Suggested Citation: Suggested Citation