Inference in asset pricing models with a low-variance factor

► A low-variance factor affects the properties of the Fama-MacBeth estimator. ► We use local-asymptotic analysis to approximate the finite sample properties. ► The zero-beta rate and risk premiums are very likely to be unreliably estimated. ► t- and F-statistics might fail to detect whether certain factors are priced. ► Kleibergen (2009)'s FAR statistic is recommended.