Testing factor models in the cross-sectionHollstein, F. and Prokopczuk, M. (2022) Testing factor models in the cross-section. Journal of Banking and Finance, 145. 106626. ISSN 0378-4266
It is advisable to refer to the publisher's version if you intend to cite from this work. See Guidance on citing. To link to this item DOI: 10.1016/j.jbankfin.2022.106626 Abstract/SummaryThe 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.
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