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The reliability of tests on the risk premia in linear factor models is threatened by limited sample sizes and weak identification of risk premia frequently encountered in applied work. We, therefore, propose novel tests on the risk premia that are robust to both limited sample sizes and the...
This paper of Kleibergen, Kong, and Zhan (2021), hereafter KKZ, represents an excellent contribution to the vast literature that concerns testing the validity of asset pricing models. I will first outline the problem and then provide some thoughts on when are the proposed methodologies relevant...
The Fama–MacBeth (FM) two-pass procedure is widely used in empirical Finance. Given a linear asset pricing model, the first step is time-series regressions of asset returns onto pricing factors to estimate the betas, which are the relevant risk measure in this setting. The second step is...
For convenience, we use the beta pricing notation for the N-dimensional asset returns Rt, t=1,…,T , as in the article: E(Rt)=ιNλ0+βλF,(1) Rt=c+βFt+ut, (2) and the related transformation for removing λ0: E(Rt)=BλF,(3) Rt=C+BFt+Ut,(4) where Rt=JNRt, C=JNc, B=JNβ, Ut=JNut with JN=(IN−1,−ιN−1) ....
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