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On Stable Factor Structures in the Pricing of Risk: Do Time-Varying Betas Help or Hurt?

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Author Info
Eric Ghysels (Department of Economics, Pennsylvania State University and CIRANO)
Abstract

There is now considerable evidence suggesting that estimated betas of unconditional capital asset pricing models (CAPMs) exhibit statistically significant time variation. Therefore, many have advocated the use of conditional CAPMs. If we succeed in capturing the dynamics of beta risk, we are sure to outperform constant beta models. However, if the beta risk is inherently misspecified, there is a real possibility that we commit serious pricing errors, potentially larger than with a constant traditional beta model. In this paper we show that this is indeed the case, namely that pricing errors with constant traditional beta models are smaller than with conditional CAPMs. Copyright The American Finance Association 1998.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 53 (1998)
Issue (Month): 2 (04)
Pages: 549-573
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Handle: RePEc:bla:jfinan:v:53:y:1998:i:2:p:549-573

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  1. Javed Iqbal & Robert Brooks & Don U.A. Galagedera, 2008. "Testing Conditional Asset Pricing Models: An Emerging Market Perspective," Monash Econometrics and Business Statistics Working Papers 3/08, Monash University, Department of Econometrics and Business Statistics. [Downloadable!]
  2. Elena Andreou & Eric Ghysels, 2004. "The Impact of Sampling Frequency and Volatility Estimators on Change-Point Tests," CIRANO Working Papers 2004s-25, CIRANO. [Downloadable!]
  3. Martin Scheicher, 2000. "Time-varying risk in the German stock market," European Journal of Finance, Taylor and Francis Journals, vol. 6(1), pages 70-91, March. [Downloadable!] (restricted)
  4. Mattia Ciprian & Stefano d'Addona, 2005. "Time Varying Sensitivities on a GRID architecture," Finance 0511007, EconWPA. [Downloadable!]
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  5. Thierry Post & Haim Levy, 2002. "Does Risk Seeking drive Asset Prices?," Tinbergen Institute Discussion Papers 02-070/2, Tinbergen Institute. [Downloadable!]
  6. Schrimpf, Andreas & Schröder, Michael & Stehle, Richard, 2006. "Evaluating conditional asset pricing models for the German stock market," ZEW Discussion Papers 06-43, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
  7. Ho-Chuan Huang & Wan-hsiu Cheng, 2005. "Tests of the CAPM under structural changes," International Economic Journal, Korean International Economic Association, vol. 19(4), pages 523-541, December. [Downloadable!] (restricted)
  8. Post, G.T. & Levy, H., 2002. "Does Risk Seeking Drive Asset Prices? A stochastic dominance analysis of aggregate investor preferences," Research Paper ERS-2002-50-F&A Revision_, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
  9. Michael W. Brandt & David A. Chapman, 2006. "Linear Approximations and Tests of Conditional Pricing Models," NBER Working Papers 12513, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Manuel Ammann & Michael Steiner, 2008. "Risk Factors for the Swiss Stock Market," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 144(I), pages 1-35, March. [Downloadable!]
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