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An out-of-sample cross-sectional regression coefficient test of alpha in asset pricing models is investigated. The test is straightforward, easy to implement, supported by statistical precedent in the literature, applicable to linear and nonlinear models, and supplements in-sample GRS alpha tests of average pricing errors. Using U.S. stock returns, consistent with model misspecification, we find that the CAPM as well as prominent multifactor models have significant alpha coefficients in cross-sectional regressions. We conclude that the cross-sectional distribution of alphas across test assets contains useful information about model validity.
Kolari et al. (Sat,) studied this question.
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