Journal of Banking & Finance Vol. 145 2022
Testing Factor Models in the Cross-Section
Abstract
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 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.
- DOI
- 10.1016/j.jbankfin.2022.106626
- Volume
- 145
- Pages
- 106626
- Language
- en
- Sources
- bibtex:phds-export.bib crossref openalex