Balduzzi, Pierluigi; Robotti, Cesare - In: Journal of Business & Economic Statistics 26 (2008), pp. 354-368
We consider two formulations of the linear factor model (LFM) with nontraded factors. In the first formulation, LFM, risk premia and alphas are estimated by a cross-sectional regression of average returns on betas. In the second formulation, LFM*, the factors are replaced by their projections on...