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Testing Conditional Factor Models

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  • Dennis Kristensen

    ()
    (Columbia University and CREATES)

  • Andrew Ang

    ()
    (Columbia University and NBER)

Abstract

We develop a new methodology for estimating time-varying factor loadings and conditional alphas based on nonparametric techniques. We test whether long-run alphas, or averages of conditional alphas over the sample, are equal to zero and derive test statistics for the constancy of factor loadings. The tests can be performed for a single asset or jointly across portfolios. The traditional Gibbons, Ross and Shanken (1989) test arises as a special case when there is no time variation in the factor loadings. As applications of the methodology, we estimate conditional CAPM and Fama and French (1993) 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

Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2009-09.

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Length: 47
Date of creation: 04 Mar 2009
Date of revision:
Handle: RePEc:aah:create:2009-09

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Web page: http://www.econ.au.dk/afn/

Related research

Keywords: factor models; time-varying loadings; nonparametric estimation; kernel methods; testing;

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Cited by:
  1. Brière, Marie & Ang, Andrew & Signori, Ombretta, 2012. "Inflation and Individual Equities," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/7847, Paris Dauphine University.
  2. Xun Lu & Liangjun Su, 2014. "Jackknife Model Averaging for Quantile Regressions," Working Papers, Singapore Management University, School of Economics 11-2014, Singapore Management University, School of Economics.
  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. Andrew Ang & Dennis Kristensen, 2011. "Testing Conditional Factor Models," NBER Working Papers 17561, National Bureau of Economic Research, Inc.
  5. Zárraga Alonso, Ainhoa & Nieto Domenech, Belén & Orbe Mandaluniz, Susan, 2011. "Time-Varying Beta Estimators in the Mexican Emerging Market," BILTOKI, Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística) 2011-06, Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística).
  6. Sermin Gungor & Jesus Sierra, 2014. "Search-for-Yield in Canadian Fixed-Income Mutual Funds and Monetary Policy," Working Papers, Bank of Canada 14-3, Bank of Canada.
  7. Markus Reiß & Viktor Todorov & George Tauchen, 2014. "Nonparametric Test for a Constant Beta over a Fixed Time Interval," SFB 649 Discussion Papers, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany SFB649DP2014-022, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  8. 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.
  9. Fernando M. Duarte, 2013. "Inflation risk and the cross section of stock returns," Staff Reports, Federal Reserve Bank of New York 621, Federal Reserve Bank of New York.
  10. Baele, Lieven & Bekaert, Geert & Inghelbrecht, Koen & Wei, Min, 2014. "Flights to Safety," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2014-46, Board of Governors of the Federal Reserve System (U.S.).
  11. Baele, Lieven & Londono, Juan M., 2013. "Understanding industry betas," Journal of Empirical Finance, Elsevier, Elsevier, vol. 22(C), pages 30-51.
  12. Kang, Hankil & Kang, Jangkoo & Lee, Changjun, 2013. "Do the production-based factors capture the time-varying patterns in stock returns?," Emerging Markets Review, Elsevier, Elsevier, vol. 15(C), pages 122-135.
  13. Dennis Kristensen, 2009. "Semiparametric Modelling and Estimation: A Selective Overview," CREATES Research Papers, School of Economics and Management, University of Aarhus 2009-44, School of Economics and Management, University of Aarhus.
  14. Yan Li & Liangjun Su & Yuewu Xu, 2014. "A Combined Approach to the Inference of Conditional Factor Models," Working Papers, Singapore Management University, School of Economics 10-2014, Singapore Management University, School of Economics.
  15. Londono Yarce, J.M., 2011. "Essays on asset pricing," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-5146522, Tilburg University.
  16. Corradi, Valentina & Distaso, Walter & Fernandes, Marcelo, 2013. "Conditional alphas and realized betas," Textos para discussão, Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil) 341, Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
  17. Arnold, Marc & Wagner, Alexander F. & Westermann, Ramona, 2013. "Growth options, macroeconomic conditions, and the cross section of credit risk," Journal of Financial Economics, Elsevier, Elsevier, vol. 107(2), pages 350-385.
  18. 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, Elsevier, vol. 102(2), pages 363-389.
  19. Sainan Jin & Liangjun Su & Yonghui Zhang, 2014. "Nonparametric Testing for Anomaly Effects in Empirical Asset Pricing Models," Working Papers, Singapore Management University, School of Economics 09-2014, Singapore Management University, School of Economics.

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