Assessing goodness-of-fit of asset pricing models

the distribution of the maximal R2

F. Douglas Foster, Tom Smith, Robert E. Whaley

Research output: Contribution to journalArticle

95 Citations (Scopus)

Abstract

The development of asset pricing models that rely on instrumental variables together with the increased availability of easily-accessible economic time-series have renewed interest in predicting security returns. Evaluating the significance of these new research findings, however, is no easy task. Because these asset pricing theory tests are not independent, classical methods of assessing goodness-of-fit are inappropriate. This study investigates the distribution of the maximal R2 when k of m regressors are used to predict security returns. We provide a simple procedure that adjusts critical R2 values to account for selecting variables by searching among potential regressors.

Original languageEnglish
Pages (from-to)591-607
Number of pages17
JournalJournal of Finance
Volume52
Issue number2
DOIs
Publication statusPublished - Jun 1997
Externally publishedYes

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