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On Stable Factor Structurs in the Pricing of Risk

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  • Ghysels, E.

Abstract

Much of the research describing the cross-sectional and time series behavior of asset returns can be characterized as a search for the relevant state variables and also a search for the relevant model specification. Ultimately the scope of such efforts is to find a satisfactory and stable asset pricing structure. In this paper we discuss various methods to accomplish this and appraise the success of two recently proposed classes of asset pricing models in tracking predictable patterns in risk and return trade-offs. The two classes are the conditional CAPM and the nonlinear APT. The parameters of both models are estimated via a set of moment conditions using the GMM estimator and the model fit is judged on the basis of the overidentifying restrictions. The fundamental problem is that overidentifying restrictions tests are not designed to diagnose whether a model, provides a stable relationship between the return series and risk factors. We use a set of recently developed tests for structural stability of parameter estimates for the GMM estimator to diagnose which factor structures appear stable through time in the context of the two aforementioned classes of models. In the course of trying to sort out whether there is systematic mispricing we shall also try to determine what type of model looks most promising for further development. In that regard we find the nonlinear APT more satisfactory than the conditional APT and CAPM.

Dans cette étude nous réexaminons les modèles à facteurs qui ont été proposés récemment, c'est à dire le CAPM conditionnel et l'APT non-linéaire. Ces modèles ont été estimés par la méthode des moments généralisée. La diagnostique usuelle pour juger ces modèles est la statistique de suridentification. Le problème fondamental de cette statistique est qu'elle n'a pas de puissance par rapport à des alternatives caractérisés par des variations de paramètres. Évidement, ces variations entraînent des erreurs sur l'évaluati

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Bibliographic Info

Paper provided by Centre interuniversitaire de recherche en économie quantitative, CIREQ in its series Cahiers de recherche with number 9525.

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Length: 36 pages
Date of creation: 1995
Date of revision:
Handle: RePEc:mtl:montec:9525

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Keywords: EVALUATION; ECONOMETRICS; ECONOMIC MODELS; TEST;

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References

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  1. Ghysels, Eric & Hall, Alastair, 1990. "A Test for Structural Stability of Euler Conditions Parameters Estimated via the Generalized Method of Moments Estimator," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(2), pages 355-64, May.
  2. Ferson, Wayne E & Korajczyk, Robert A, 1995. "Do Arbitrage Pricing Models Explain the Predictability of Stock Returns?," The Journal of Business, University of Chicago Press, vol. 68(3), pages 309-49, July.
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  4. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  5. Eric Ghysels & Alain Guay & Alastair Hall, 1995. "Predictive Tests for Structural Change with Unknown Breakpoint," CIRANO Working Papers 95s-20, CIRANO.
  6. Lars Peter Hansen & Ravi Jagannathan, 1990. "Implications of security market data for models of dynamic economies," Discussion Paper / Institute for Empirical Macroeconomics 29, Federal Reserve Bank of Minneapolis.
  7. René Garcia & Eric Ghysels, 1996. "Structural Change and Asset Pricing in Emerging Markets," CIRANO Working Papers 96s-34, CIRANO.
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Citations

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Cited by:
  1. Elena Andreou, 2004. "The Impact of Sampling Frequency and Volatility Estimators on Change-Point Tests," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 2(2), pages 290-318.
  2. Marco Bonomo & René Garcia, 1997. "Tests of Conditional Asset Pricing Models in the Brazilian Stock Market," CIRANO Working Papers 97s-20, CIRANO.
  3. Post, G.T., 2003. "Statistical Inference on Stochastic Dominance Efficiency. Do Omitted Risk Factors Explain the Size and Book-to-Market Effects?," Research Paper ERS-2003-017-F&A, 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.
  4. Wayne E. Ferson & Andrew F. Siegel, 2006. "Testing Portfolio Efficiency with Conditioning Information," NBER Working Papers 12098, National Bureau of Economic Research, Inc.
  5. Thierry Post & Haim Levy, 2002. "Does Risk Seeking drive Asset Prices?," Tinbergen Institute Discussion Papers 02-070/2, Tinbergen Institute.
  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.
  7. Wayne E. Ferson & Campbell R. Harvey, 1999. "Conditioning Variables and the Cross Section of Stock Returns," Journal of Finance, American Finance Association, vol. 54(4), pages 1325-1360, 08.
  8. 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.
  9. Geert Bekaert & Guojun Wu, 1997. "Asymmetric Volatility and Risk in Equity Markets," NBER Working Papers 6022, National Bureau of Economic Research, Inc.
  10. Touhami, A. & Martens, A., 1996. "Macroemesures in Computable General Equilibrium Models: a Probabilistic Treatment with an Application to Morocco," Cahiers de recherche 9621, Universite de Montreal, Departement de sciences economiques.
  11. Mattia Ciprian & Stefano d'Addona, 2005. "Time Varying Sensitivities on a GRID architecture," Finance 0511007, EconWPA.
  12. 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.
  13. 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.

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