Meng, Ginger and Hu, Gang and Bai, Jushan (2007): Olive: a simple method for estimating betas when factors are measured with error. Published in: The Journal of Financial Research , Vol. XXXIV, No. 1 (2011): pp. 27-60.
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We propose a simple and intuitive method for estimating betas when factors are measured with error: ordinary least squares instrumental variable estimator (OLIVE). OLIVE performs well when the number of instruments becomes large, while the performance of conventional instrumental variable methods becomes poor or even infeasible. In an empirical application, OLIVE beta estimates improve R-squared significantly. More importantly, our results help resolve two puzzling findings in the prior literature: first, the sign of average risk premium on the beta for market return changes from negative to positive; second, the estimated value of average zero-beta rate is no longer too high.
|Item Type:||MPRA Paper|
|Original Title:||Olive: a simple method for estimating betas when factors are measured with error.|
|Keywords:||betas, factor analysis, GMM, FIML, measurement error|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
G - Financial Economics > G1 - General Financial Markets > G10 - General
C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models; Multiple Variables > C33 - Models with Panel Data; Longitudinal Data; Spatial Time Series
|Depositing User:||Jushan Bai|
|Date Deposited:||07. Nov 2011 01:32|
|Last Modified:||12. Feb 2013 08:54|
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