Factor Sufficiency in Asset Pricing: An Application for the Brazilian Market
The multifactor asset pricing model derived from the Fama–French approach is extensively used in asset risk premium estimation procedures. Even including a considerable number of factors, it is still possible that omitted factors affect the estimation of this model. In this work, we compare estimato...
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| Format: | Article |
| Language: | English |
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MDPI AG
2023-12-01
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| Series: | International Journal of Financial Studies |
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| Online Access: | https://www.mdpi.com/2227-7072/11/4/144 |
| _version_ | 1797358052362420224 |
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| author | Rafaela Dezidério dos Santos Rocha Márcio Laurini |
| author_facet | Rafaela Dezidério dos Santos Rocha Márcio Laurini |
| author_sort | Rafaela Dezidério dos Santos Rocha |
| collection | DOAJ |
| description | The multifactor asset pricing model derived from the Fama–French approach is extensively used in asset risk premium estimation procedures. Even including a considerable number of factors, it is still possible that omitted factors affect the estimation of this model. In this work, we compare estimators robust to the presence of omitted factors in estimating the risk premium in the Brazilian market. Initially, we analyze the panel of asset returns using the mean group and common correlated effect estimators to detect the presence of omitted factors. We then compare the results with those obtained by a estimator robust to omitted variables, which uses a principal components approach to correct the estimation in the case of the omission of latent factors. We conclude that there is evidence of omitted factors, and the best predictor for the expect returns is the common correlated effects estimator. |
| first_indexed | 2024-03-08T14:54:13Z |
| format | Article |
| id | doaj.art-468da724eb324bdc9a0e32f9c7f25bf4 |
| institution | Directory Open Access Journal |
| issn | 2227-7072 |
| language | English |
| last_indexed | 2024-03-08T14:54:13Z |
| publishDate | 2023-12-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | International Journal of Financial Studies |
| spelling | doaj.art-468da724eb324bdc9a0e32f9c7f25bf42024-01-10T17:49:20ZengMDPI AGInternational Journal of Financial Studies2227-70722023-12-0111414410.3390/ijfs11040144Factor Sufficiency in Asset Pricing: An Application for the Brazilian MarketRafaela Dezidério dos Santos Rocha0Márcio Laurini1Department of Economics, FEARP-University of São Paulo, Ribeirão Preto 14040-905, BrazilDepartment of Economics, FEARP-University of São Paulo, Ribeirão Preto 14040-905, BrazilThe multifactor asset pricing model derived from the Fama–French approach is extensively used in asset risk premium estimation procedures. Even including a considerable number of factors, it is still possible that omitted factors affect the estimation of this model. In this work, we compare estimators robust to the presence of omitted factors in estimating the risk premium in the Brazilian market. Initially, we analyze the panel of asset returns using the mean group and common correlated effect estimators to detect the presence of omitted factors. We then compare the results with those obtained by a estimator robust to omitted variables, which uses a principal components approach to correct the estimation in the case of the omission of latent factors. We conclude that there is evidence of omitted factors, and the best predictor for the expect returns is the common correlated effects estimator.https://www.mdpi.com/2227-7072/11/4/144robust estimationrisk premiaasset pricingmis-specification |
| spellingShingle | Rafaela Dezidério dos Santos Rocha Márcio Laurini Factor Sufficiency in Asset Pricing: An Application for the Brazilian Market International Journal of Financial Studies robust estimation risk premia asset pricing mis-specification |
| title | Factor Sufficiency in Asset Pricing: An Application for the Brazilian Market |
| title_full | Factor Sufficiency in Asset Pricing: An Application for the Brazilian Market |
| title_fullStr | Factor Sufficiency in Asset Pricing: An Application for the Brazilian Market |
| title_full_unstemmed | Factor Sufficiency in Asset Pricing: An Application for the Brazilian Market |
| title_short | Factor Sufficiency in Asset Pricing: An Application for the Brazilian Market |
| title_sort | factor sufficiency in asset pricing an application for the brazilian market |
| topic | robust estimation risk premia asset pricing mis-specification |
| url | https://www.mdpi.com/2227-7072/11/4/144 |
| work_keys_str_mv | AT rafaeladezideriodossantosrocha factorsufficiencyinassetpricinganapplicationforthebrazilianmarket AT marciolaurini factorsufficiencyinassetpricinganapplicationforthebrazilianmarket |