Pricing model performance and the two-pass cross-sectional regression methodology

@inproceedings{Robotti2009PricingMP,
  title={Pricing model performance and the two-pass cross-sectional regression methodology},
  author={Cesare Robotti and Jay A. Shanken},
  year={2009}
}
Since Black, Jensen, and Scholes (1972) and Fama and MacBeth (1973), the two-pass crosssectional regression (CSR) methodology has become the most popular approach for estimating and testing asset pricing models. Statistical inference with this method is typically conducted under the assumption that the models are correctly specified, that is, expected returns are exactly linear in asset betas. This assumption can be a problem in practice since all models are, at best, approximations of reality… CONTINUE READING
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