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EFFICIENCY GAINS IN BETA‐PRICING MODELS 1
Author(s) -
Christensen Bent Jesper
Publication year - 1994
Publication title -
mathematical finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.98
H-Index - 81
eISSN - 1467-9965
pISSN - 0960-1627
DOI - 10.1111/j.1467-9965.1994.tb00054.x
Subject(s) - beta (programming language) , econometrics , economics , context (archaeology) , risk premium , capital asset pricing model , computer science , paleontology , biology , programming language
Recent literature shows that the risk premium is efficiently estimated in the usual two‐pass procedure, estimating betas in the unrestricted model, and then regressing returns on estimated betas. This paper shows that this is not so when allowing for factor unobservability. Imposing the financial theory restriction from the outset leads to a strictly positive efficiency gain in the risk premium estimation. In addition, the role of an associated efficiency gain in the beta estimation is studied in the context of a zero‐beta model.