Advanced Search
MyIDEAS: Login to save this paper or follow this series

A Bayesian multi-factor model of instability in prices and quantities of risk in U.S. financial markets

Contents:

Author Info

  • Massimo Guidolin
  • Francesco Ravazzolo
  • Andrea Donato Tortora

Abstract

This paper analyzes the empirical performance of two alternative ways in which multi-factor models with time-varying risk exposures and premia may be estimated. The first method echoes the seminal two-pass approach advocated by Fama and MacBeth (1973). The second approach extends previous work by Ouysse and Kohn (2010) and is based on a Bayesian approach to modelling the latent process followed by risk exposures and idiosynchratic volatility. Our application to monthly, 1979-2008 U.S. data for stock, bond, and publicly traded real estate returns shows that the classical, two-stage approach that relies on a nonparametric, rolling window modelling of time-varying betas yields results that are unreasonable. There is evidence that all the portfolios of stocks, bonds, and REITs have been grossly over-priced. On the contrary, the Bayesian approach yields sensible results as most portfolios do not appear to have been misspriced and a few risk premia are precisely estimated with a plausibile sign. Real consumption growth risk turns out to be the only factor that is persistently priced throughout the sample.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://research.stlouisfed.org/wp/2011/2011-003.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2011-003.

as in new window
Length:
Date of creation: 2011
Date of revision:
Handle: RePEc:fip:fedlwp:2011-003

Contact details of provider:
Postal: P.O. Box 442, St. Louis, MO 63166
Fax: (314)444-8753
Web page: http://www.stlouisfed.org/
More information through EDIRC

Order Information:
Email:

Related research

Keywords: Econometric models ; Stochastic analysis ; Financial markets;

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. de Pooter, M.D. & Ravazzolo, F. & Segers, R. & van Dijk, H.K., 2008. "Bayesian near-boundary analysis in basic macroeconomic time series models," Econometric Institute Research Papers EI 2008-13, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Massimo Guidolin & Francesco Ravazzolo & Andrea Donato Tortora, 2011. "Myths and facts about the alleged over-pricing of U.S. real estate. Evidence from multi-factor asset pricing models of REIT returns," Working Paper 2011/19, Norges Bank.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:fip:fedlwp:2011-003. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anna Xiao).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.