Estimating and Testing Beta Pricing Models: Alternative Methods and Their Performance in Simulations

61 Pages Posted: 21 Jan 2006

See all articles by Jay A. Shanken

Jay A. Shanken

Emory University - Goizueta Business School; National Bureau of Economic Research (NBER)

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School; China Academy of Financial Research (CAFR)

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Date Written: January 2006

Abstract

In this paper, we conduct a simulation analysis of the Fama and MacBeth (1973) two-pass procedure, as well as maximum likelihood (ML) and generalized method of moments estimators of cross-sectional expected return models. We also provide some new analytical results on computational issues, the relations between estimators, and asymptotic distributions under model misspecification. The GLS estimator is often much more precise than the usual OLS estimator, but it displays more bias as well. A truncated form of ML performs quite well overall in terms of bias and precision, but produces less reliable inferences than the OLS estimator.

Keywords: Fama and MacBeth, two-pass procedure, GLS, GMM

JEL Classification: G12, G14, G32, C31, C33

Suggested Citation

Shanken, Jay A. and Zhou, Guofu, Estimating and Testing Beta Pricing Models: Alternative Methods and Their Performance in Simulations (January 2006). Available at SSRN: https://ssrn.com/abstract=877184 or http://dx.doi.org/10.2139/ssrn.877184

Jay A. Shanken

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Guofu Zhou (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

Washington University
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6384 (Phone)
314-658-6359 (Fax)

HOME PAGE: http://apps.olin.wustl.edu/faculty/zhou/

China Academy of Financial Research (CAFR)

Shanghai Advanced Institute of Finance
Shanghai P.R.China, 200030
China

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