02787cam a22003257 4500001000700000003000500007005001700012008004100029100001800070245015400088260006600242490004200308500001500350520113200365530006101497538007201558538003601630690011001666690007701776690006901853690010101922690009302023690011202116700002102228700001802249710004202267830007702309856003802386856003702424w15047NBER20161021102009.0161021s2009 mau||||fs|||| 000 0 eng d1 aKan, Raymond.10aPricing Model Performance and the Two-Pass Cross-Sectional Regression Methodologyh[electronic resource] /cRaymond Kan, Cesare Robotti, Jay Shanken. aCambridge, Mass.bNational Bureau of Economic Researchc2009.1 aNBER working paper seriesvno. w15047 aJune 2009.3 aSince Black, Jensen, and Scholes (1972) and Fama and MacBeth (1973), the two-pass cross-sectional 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, i.e., expected returns are exactly linear in asset betas. This can be a problem in practice since all models are, at best, approximations of reality and are likely to be subject to a certain degree of misspecification. We propose a general methodology for computing misspecification-robust asymptotic standard errors of the risk premia estimates. We also derive the asymptotic distribution of the sample CSR R2 and develop a test of whether two competing beta pricing models have the same population R2. This provides a formal alternative to the common heuristic of simply comparing the R2 estimates in evaluating relative model performance. Finally, we provide an empirical application which demonstrates the importance of our new results when applied to a variety of asset pricing models. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aC1 - Econometric and Statistical Methods and Methodology: General2Journal of Economic Literature class. 7aC12 - Hypothesis Testing: General2Journal of Economic Literature class. 7aC13 - Estimation: General2Journal of Economic Literature class. 7aC4 - Econometric and Statistical Methods: Special Topics2Journal of Economic Literature class. 7aC52 - Model Evaluation, Validation, and Selection2Journal of Economic Literature class. 7aG12 - Asset Pricing • Trading Volume • Bond Interest Rates2Journal of Economic Literature class.1 aRobotti, Cesare.1 aShanken, Jay.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w15047.4 uhttp://www.nber.org/papers/w1504741uhttp://dx.doi.org/10.3386/w15047