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Firm Characteristics, Cross-Sectional Regression Estimates, and Asset Pricing Tests

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  • Chris Kirby
  • Nikolai Roussanov

Abstract

I test a number of well-known asset pricing models using regression-based managed portfolios that capture nonlinearity in the cross-sectional relation between firm characteristics and expected stock returns. Although the average portfolio returns point to substantial nonlinearity in the data, none of the asset pricing models successfully explain the estimated nonlinear effects. Indeed, the estimated expected returns produced by the models display almost no variation across portfolios. Because the tests soundly reject every model considered, it is apparent that nonlinearity in the relation between firm characteristics and expected stock returns poses a formidable challenge to asset pricing theory.

Suggested Citation

  • Chris Kirby & Nikolai Roussanov, 2020. "Firm Characteristics, Cross-Sectional Regression Estimates, and Asset Pricing Tests," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 10(2), pages 290-334.
    • Handle: RePEc:oup:rasset:v:10:y:2020:i:2:p:290-334.
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    File URL: http://hdl.handle.net/10.1093/rapstu/raz005
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    Citations

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    Cited by:

    1. Chiang, I-Hsuan Ethan & Kirby, Chris & Nie, Ziye Zoe, 2021. "Short-term reversals, short-term momentum, and news-driven trading activity," Journal of Banking & Finance, Elsevier, vol. 125(C).
    2. Guillaume Coqueret, 2022. "Characteristics-driven returns in equilibrium," Papers 2203.07865, arXiv.org.
    3. Lioui, Abraham & Tarelli, Andrea, 2022. "Chasing the ESG factor," Journal of Banking & Finance, Elsevier, vol. 139(C).

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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