Olive: A simple method for estimating betas when factors are measured with error

J. Ginger Meng, Gang Hu, Jushan Bai

Research output: Journal article publicationJournal articleAcademic researchpeer-review

8 Citations (Scopus)

Abstract

We propose a simple and intuitive method for estimating betas when factors are measured with error: ordinary least squares instrumental variable estimator (OLIVE). OLIVE performs well when the number of instruments becomes large, whereas the performance of conventional instrumental variable methods becomes poor or even infeasible. In an empirical application, OLIVE beta estimates improveR2significantly. More important, our results help resolve two puzzling findings in the prior literature: first, the sign of average risk premium on the beta for market return changes from negative to positive; second, the estimated value of average zero-beta rate is no longer too high.
Original languageEnglish
Pages (from-to)27-60
Number of pages34
JournalJournal of Financial Research
Volume34
Issue number1
DOIs
Publication statusPublished - 1 Mar 2011
Externally publishedYes

Keywords

  • C30
  • G12

ASJC Scopus subject areas

  • Accounting
  • Finance

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