Testing factor models in the cross-section

Hollstein, F. and Prokopczuk, M. (2022) Testing factor models in the cross-section. Journal of Banking and Finance, 145. 106626. ISSN 0378-4266 doi: 10.1016/j.jbankfin.2022.106626

Abstract/Summary

The standard full-sample time-series asset pricing test suffers from poor statistical properties, look-ahead bias, constant-beta assumptions, and rejects models when average factor returns deviate from risk premia. We therefore confront prominent equity pricing models with the classical Fama and MacBeth (1973) cross-sectional test. For all models, we uncover three main findings: (i) the intercept coefficients are economically large and highly statistically significant; (ii) cross-sectional factor risk premium estimates are generally far below the average factor excess returns; and (iii) they are usually not statistically significant. Overall, all new factor models are inconsistent with no-arbitrage pricing and cannot accurately explain the cross-section of stock returns.

Item Type	Article
URI	https://reading-clone.eprints-hosting.org/id/eprint/107905
Identification Number/DOI	10.1016/j.jbankfin.2022.106626
Refereed	Yes
Divisions	Henley Business School > Finance and Accounting
Publisher	Elsevier
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