Premium
Pricing Model Performance and the Two‐Pass Cross‐Sectional Regression Methodology
Author(s) -
KAN RAYMOND,
ROBOTTI CESARE,
SHANKEN JAY
Publication year - 2013
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12035
Subject(s) - capital asset pricing model , econometrics , statistic , consumption based capital asset pricing model , cross sectional regression , economics , regression , sample (material) , regression analysis , consumption (sociology) , arbitrage pricing theory , linear regression , statistics , mathematics , polynomial regression , social science , chemistry , chromatography , sociology
Over the years, many asset pricing studies have employed the sample cross‐sectional regression (CSR) R 2 as a measure of model performance. We derive the asymptotic distribution of this statistic and develop associated model comparison tests, taking into account the impact of model misspecification on the variability of the CSR estimates. We encounter several examples of large R 2 differences that are not statistically significant. A version of the intertemporal capital asset pricing model (CAPM) exhibits the best overall performance, followed by the Fama–French three‐factor model. Interestingly, the performance of prominent consumption CAPMs is sensitive to variations in experimental design.