The Estimation of Risk Premia with Omitted Variable Bias: Evidence from China

Author:

Mao Jie1,Xia Tianliang1

Affiliation:

1. School of Economics, Shanghai University, No. 333 Nanchen Road Baoshan District, Shanghai 200444, China

Abstract

The Chinese stock market is replete with numerous omitted variables that can introduce biases in the standard estimation of risk premiums when traditional linear asset pricing models are applied. The three-pass method enables the estimation of risk premiums for observable factors even when not all relevant factors are explicitly specified or observed within the model. Accordingly, we have applied this method to construct portfolios with stocks from China’s A-share market as the test assets. Empirical research findings indicate that the three-pass method could be more effective than traditional linear asset pricing models in estimating risk premiums.

Funder

Innovation Fund for Prestigious Universities in Shanghai

National Innovation and Entrepreneurship Project for University Students

Publisher

MDPI AG

Subject

Strategy and Management,Economics, Econometrics and Finance (miscellaneous),Accounting

Reference21 articles.

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