Improved Inference in Financial Factor Models
The empirical research study shows that for the analysis of factor models, such as the CAPM or Fama-French model, not the widely used standard OLS regression should be used, but the newly proposed ALS version. The new adaptive estimation procedure takes into account and controls for heteroskedasticity in the data (residuals) which is particularly pronounced in times of market turbulence. The new procedure allows better testing of factor analyzes for the development and evaluation of investment strategies.
1 Ordinary least squares
2 Adaptive least squares
