New answers tagged asset-pricing
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Does including an additional pricing factor necessarily reduce the pricing errors?
Let me share some thoughts. They are not formulated in complete detail nor are they rigorously proven, but I hope the intuition is correct.
At the level of the population / data generating process
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Testing as in Fama & MacBeth vs. comparing models as in Cochrane's lecture notes
In this answer, the terms intercept, slope coefficient and $R^2$ refer to the true parameter values corresponding to the regression model in population. They do not refer to estimates unless ...
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Testing as in Fama & MacBeth vs. comparing models as in Cochrane's lecture notes
Both Fama & Macbeth and Cochrane are playing a bit loose, statistically, in their recommended procedures here. First off, numerical noise more or less guarantees that you will measure e.g. $\...
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