Testing Beta-Pricing Models Using Large Cross-Sections

58 Pages Posted: 28 Feb 2017

See all articles by Valentina Raponi

Valentina Raponi

IESE Business School; Imperial College Business School

Cesare Robotti

Imperial College Business School

Paolo Zaffaroni

Imperial College Business School

Date Written: February 27, 2017

Abstract

Building on the Shanken (1992) estimator, we develop a new methodology for estimating and testing beta-pricing models when a large number of assets N is available but the number of time-series observations is small. We show empirically that our large N framework can change substantially common empirical findings regarding estimated risk premia and validity of beta-pricing models. We generalize our theoretical results to the more realistic case of unbalanced panels. The practical relevance of our findings is confirmed via Monte Carlo simulations.

Keywords: beta-pricing models, ex-post risk premia, two-pass cross-sectional regression, large $N$ asymptotics, specification test; unbalanced panel

JEL Classification: C12, C13, G12

Suggested Citation

Raponi, Valentina and Raponi, Valentina and Robotti, Cesare and Zaffaroni, Paolo, Testing Beta-Pricing Models Using Large Cross-Sections (February 27, 2017). Available at SSRN: https://ssrn.com/abstract=2924882 or http://dx.doi.org/10.2139/ssrn.2924882

Valentina Raponi

IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Cesare Robotti

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Paolo Zaffaroni (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

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