Testing Factor Models in the Cross-Section

We confront prominent asset pricing models with the classical out-of-sample cross-sectional test of Fama and MacBeth (1973). For all models, we uncover three main findings: (i) the intercept coefficients are economically large and highly statistically significant; (ii) the cross-sectional factor risk premium estimates are far below the average factor excess returns; and (iii) they are generally not statistically significant. Thus, our findings show that the models do not only fail the equilibrium condition of the time-series test, but are also inconsistent with the weaker no-arbitrage condition. Overall, all new factor models cannot accurately explain the cross-section of stock returns.