NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

A Skeptical Appraisal of Asset-Pricing Tests

Jonathan Lewellen, Stefan Nagel, Jay Shanken

NBER Working Paper No. 12360
Issued in July 2006
NBER Program(s):   AP

It has become standard practice in the cross-sectional asset-pricing literature to evaluate models based on how well they explain average returns on size- and B/M-sorted portfolios, something many models seem to do remarkably well. In this paper, we review and critique the empirical methods used in the literature. We argue that asset-pricing tests are often highly misleading, in the sense that apparently strong explanatory power (high cross-sectional R2s and small pricing errors) in fact provides quite weak support for a model. We offer a number of suggestions for improving empirical tests and evidence that several proposed models don’t work as well as originally advertised.

download in pdf format
   (328 K)

email paper

This paper is available as PDF (328 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w12360

Published: Lewellen, Jonathan & Nagel, Stefan & Shanken, Jay, 2010. "A skeptical appraisal of asset pricing tests," Journal of Financial Economics, Elsevier, vol. 96(2), pages 175-194, May.

Users who downloaded this paper also downloaded these:
Lewellen and Nagel w9974 The Conditional CAPM does not Explain Asset-Pricing Anamolies
Diba and Grossman w1779 Rational Bubbles in Stock Prices?
Imberman, Kugler, and Sacerdote w15291 Katrina's Children: Evidence on the Structure of Peer Effects from Hurricane Evacuees
Jagannathan and Wang w8098 Empirical Evaluation of Asset Pricing Models: A Comparison of the SDF and Beta Methods
Ehrlich On the Relation between Education and Crime
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us