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Handbook of the Economics of Finance by Rene M. Stulz, Milton Harris, George M. Constantinides

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5.3 Debate

Lewellen, Nagel, and Shanken (2010; LNS) take a skeptical view of the asset pricing tests of a number of macroeconomic factor models found in several papers, including the scaled consumption-based models discussed above. Their paper offers a number of specific suggestions, designed to “raise the bar” in the statistical evaluation of asset pricing models. Several of these are sensible checks on the finite sample properties of test statistics, such as the recommendation to report confidence intervals for test statistics rather than relying merely on point estimates. Other recommendations include testing models on assets other than the size and book-market sorted portfolios commonly used, reporting GLS R-squared statistics, and imposing ...

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