101 Pages Posted: 22 Apr 2012 Last revised: 5 Jul 2014
Date Written: April 18, 2012
Over the years, many asset pricing studies have employed the sample cross-sectional regression (CSR) R2 as a measure of model performance. We derive the asymptotic distribution of this statistic and develop associated model comparison tests, taking into account the inevitable impact of model misspecification on the variability of the two-pass CSR estimates. We encounter several examples of large R2 differences that are not statistically significant. A version of the intertemporal CAPM exhibits the best overall performance, followed by the "three-factor model" of Fama and French (1993). Interestingly, the performance of prominent consumption CAPMs proves to be sensitive to variations in experimental design.
Suggested Citation: Suggested Citation
Kan, Raymond and Robotti, Cesare and Shanken, Jay A., Pricing Model Performance and the Two-Pass Cross-Sectional Regression Methodology (April 18, 2012). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1361823 or http://dx.doi.org/10.2139/ssrn.1361823