The Errors-in-Variables Problem in the Cross-Section of Expected Stock Returns
Author | : Dongcheol Kim |
Publisher | : |
Total Pages | : |
Release | : 1998 |
ISBN-10 | : OCLC:1291273355 |
ISBN-13 | : |
Rating | : 4/5 (55 Downloads) |
Download or read book The Errors-in-Variables Problem in the Cross-Section of Expected Stock Returns written by Dongcheol Kim and published by . This book was released on 1998 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: 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 paper provides a new correction for the EIV problem that is robust to conditional heteroskedasticity. 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.