Factor Strengths, Pricing Errors, and Estimation of Risk Premia

This paper examines the implications of pricing errors and factors that are not strong for Fama-MacBeth two-pass estimator risk premia its asymptotic distribution when T is fixed with n → ∞, both jointly. While literature just distinguishes weak we allow degrees strength using a recently developed measure. Our theoretical results have important practical empirical asset pricing. Pricing factor matter consistent estimation subsequent inference, thus an estimate required before attempting to risk. Finally, procedure provide rolling estimates strengths five Fama-French factors, show only market can be viewed as strong.