A Note on the Estimation of Asset Pricing Models Using Simple Regression Betas

Since Black, Jensen, and Scholes (1972) and Fama and MacBeth (1973), the two-pass cross-sectional regression (CSR) methodology has become the most popular tool for estimating and testing beta asset pricing models. In this paper, we focus on the case in which simple regression betas are used as regressors in the second-pass CSR. Under general distributional assumptions, we derive asymptotic standard errors of the risk premia estimates that are robust to model misspecification. When testing whether the beta risk of a given factor is priced, our misspecification robust standard error and the Jagannathan and Wang (1998) standard error (which is derived under the correctly specified model) can lead to different conclusions.

Keywords: two-pass cross-sectional regressions, risk premia, model misspecification, simple regression betas, multivariate betas

JEL Classification: G12

Suggested Citation: Suggested Citation

Kan, Raymond and Robotti, Cesare, A Note on the Estimation of Asset Pricing Models Using Simple Regression Betas (March 1, 2009). FRB Atlanta Working Paper No. 2009-12, Rotman School of Management Working Paper No. 2482325, Available at SSRN: https://ssrn.com/abstract=2482325 or http://dx.doi.org/10.2139/ssrn.2482325