Assessing Goodness-of-Fit of Asset Pricing Models: The Distribution of the Maximal R2

JOURNAL OF FINANCE, Vol 52 No 2, June 1997

Posted: 10 Mar 1997

See all articles by F. Douglas Foster

F. Douglas Foster

The University of Sydney - Discipline of Finance; Financial Research Network (FIRN)

Tom Smith

University of Queensland - Faculty of Business, Economics and Law; Financial Research Network (FIRN)

Robert E. Whaley

Vanderbilt University - Finance

Abstract

The development of asset pricing models that rely on instrumental variables together with the increased availability of easily-accessible economic time-series have renewed interest in predicting security returns. Evaluating the significance of these new research findings, however, is no easy task. Because these asset pricing theory tests are not independent, classical methods of assessing goodness-of-fit are inappropriate. This study investigates the distribution of the maximal R2 when k of m regressors are used to predict security returns. We provide a simple procedure that adjusts critical R2 values to account for selecting variables by searching among potential regressors.

JEL Classification: E31

Suggested Citation

Foster, F. Douglas and Smith, Tom M. and Whaley, Robert E., Assessing Goodness-of-Fit of Asset Pricing Models: The Distribution of the Maximal R2. JOURNAL OF FINANCE, Vol 52 No 2, June 1997. Available at SSRN: https://ssrn.com/abstract=3782

F. Douglas Foster (Contact Author)

The University of Sydney - Discipline of Finance ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Tom M. Smith

University of Queensland - Faculty of Business, Economics and Law ( email )

4072 Brisbane, Queensland
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Robert E. Whaley

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States
615-343-7747 (Phone)
615-376-8879 (Fax)

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