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Evaluating alternative methods of asset pricing based on the overall magnitude of pricing errors

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  • Shi, Qi
  • Li, Bin

Abstract

We are the first pioneers who evaluate the overall fitness of the two-pass Fama–MacBeth regression and the generalized method of moments (GMM) by comparing the R2 or mean absolute pricing error (MAE), using a Monte Carlo simulation of different models and portfolios for hundreds of trials and, in particular, focusing on the case that the expected return is always a gross return in both methods. Our findings reveal an innovative finding that both methodologies achieve approximate overall magnitudes of pricing errors.

Suggested Citation

  • Shi, Qi & Li, Bin, 2019. "Evaluating alternative methods of asset pricing based on the overall magnitude of pricing errors," Finance Research Letters, Elsevier, vol. 29(C), pages 125-128.
    • Handle: RePEc:eee:finlet:v:29:y:2019:i:c:p:125-128
    DOI: 10.1016/j.frl.2019.03.005
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    References listed on IDEAS

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    More about this item

    Keywords

    Fama–MacBeth regression; GMM; Pricing errors; Monte Carlo simulation;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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