Journal of Finance Vol. 50 No. 5 1995
The Errors in the Variables Problem in the Cross-Section of Expected Stock Returns
Abstract
Recent research has documented the failure of market beta to capture the cross-section of expected returns within the context of a two-pass estimation methodology. However, the two-pass methodology suffers from the errors-in-variables (EIV) problem that could attenuate the apparent significance of market beta. This article provides a new correction for the EIV problem that is robust to conditional heteroscedasticity. After the correction, I find more support for the role of market beta and less support for the role of firm size in explaining the cross-section of expected returns. While the EIV correction leads to a diminished role of firm size, the size variable remains a significant force in explaining the cross-section of expected returns.
- DOI
- 10.2307/2329328
- Volume
- 50
- Issue
- 5
- Pages
- 1605
- Sources
- openalex crossref