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Testing Factor Models in the Cross-Section
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DOI：10.1016/j.jbankfin.2022.106626.png)
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Abstract
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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 esti-mates 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.(c) 2022 Elsevier B.V. All rights reserved.
Keywords:
Factor models
cross-sectional tests
no-arbitrage pricing
beta estimation
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