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Testing conditional factor models

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  • Ang, Andrew
  • Kristensen, Dennis

Abstract

Using nonparametric techniques, we develop a methodology for estimating and testing conditional alphas and betas and long-run alphas and betas, which are the averages of conditional alphas and betas, respectively, across time. The estimators and tests can be implemented for a single asset or jointly across portfolios. The traditional Gibbons, Ross, and Shanken (1989) test arises as a special case of no time variation in the alphas and factor loadings and homoskedasticity. As applications of the methodology, we estimate conditional CAPM and multifactor models on book-to-market and momentum decile portfolios. We reject the null that long-run alphas are equal to zero even though there is substantial variation in the conditional factor loadings of these portfolios.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 106 (2012)
Issue (Month): 1 ()
Pages: 132-156

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Handle: RePEc:eee:jfinec:v:106:y:2012:i:1:p:132-156

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Web page: http://www.elsevier.com/locate/inca/505576

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Keywords: Nonparametric estimator; Time-varying beta; Conditional alpha; Book-to-market premium; Value and momentum;

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Citations

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Cited by:
  1. Londono Yarce, J.M., 2011. "Essays on asset pricing," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5146522, Tilburg University.
  2. Sermin Gungor & Jesus Sierra, 2014. "Search-for-Yield in Canadian Fixed-Income Mutual Funds and Monetary Policy," Working Papers 14-3, Bank of Canada.
  3. Cosemans, M. & Frehen, R.G.P. & Schotman, P.C. & Bauer, R.M.M.J., 2009. "Efficient Estimation of Firm-Specific Betas and its Benefits for Asset Pricing Tests and Portfolio Choice," MPRA Paper 23557, University Library of Munich, Germany.
  4. Kang, Hankil & Kang, Jangkoo & Lee, Changjun, 2013. "Do the production-based factors capture the time-varying patterns in stock returns?," Emerging Markets Review, Elsevier, vol. 15(C), pages 122-135.
  5. Zárraga Alonso, Ainhoa & Nieto Domenech, Belén & Orbe Mandaluniz, Susan, 2011. "Time-Varying Beta Estimators in the Mexican Emerging Market," BILTOKI 2011-06, Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística).
  6. Lieven Baele & Geert Bekaert & Koen Inghelbrecht & Min Wei, 2012. "Flights to Safety," Working Paper Research 230, National Bank of Belgium.
  7. Andrew Ang & Marie Brière & Ombretta Signori, 2012. "Inflation and Individual Equities," NBER Working Papers 17798, National Bureau of Economic Research, Inc.
  8. Arnold, Marc & Wagner, Alexander F. & Westermann, Ramona, 2013. "Growth options, macroeconomic conditions, and the cross section of credit risk," Journal of Financial Economics, Elsevier, vol. 107(2), pages 350-385.
  9. Fernando M. Duarte, 2013. "Inflation risk and the cross section of stock returns," Staff Reports 621, Federal Reserve Bank of New York.
  10. Baele, Lieven & Londono, Juan M., 2013. "Understanding industry betas," Journal of Empirical Finance, Elsevier, vol. 22(C), pages 30-51.
  11. Markus Reiß & Viktor Todorov & George Tauchen, 2014. "Nonparametric Test for a Constant Beta over a Fixed Time Interval," SFB 649 Discussion Papers SFB649DP2014-022, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  12. Andrew Ang & Dennis Kristensen, 2011. "Testing Conditional Factor Models," NBER Working Papers 17561, National Bureau of Economic Research, Inc.
  13. Nikolai Roussanov, 2010. "Composition of Wealth, Conditioning Information, and the Cross-Section of Stock Returns," NBER Working Papers 16073, National Bureau of Economic Research, Inc.
  14. Corradi, Valentina & Distaso, Walter & Fernandes, Marcelo, 2013. "Conditional alphas and realized betas," Textos para discussão 341, Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
  15. Dennis Kristensen, 2009. "Semiparametric Modelling and Estimation: A Selective Overview," CREATES Research Papers 2009-44, School of Economics and Management, University of Aarhus.
  16. Boguth, Oliver & Carlson, Murray & Fisher, Adlai & Simutin, Mikhail, 2011. "Conditional risk and performance evaluation: Volatility timing, overconditioning, and new estimates of momentum alphas," Journal of Financial Economics, Elsevier, vol. 102(2), pages 363-389.

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