Journal of Financial Economics
We show that out-of-sample Sharpe ratios for multi-factor asset pricing models are significantly lower than their in-sample ones and estimation risk is one important reason for such a gap; therefore, the effect of estimation risk needs to be taken into account when comparing across asset pricing models.
Xiaolu Wang is an associate professor of finance/chartered financial analyst at the Ivy College of Business. Her paper is published in Journal of Financial Economics.