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Testing Conditional Factor Models

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  • Andrew Ang
  • Dennis Kristensen

Abstract

Using nonparametric techniques, we develop a methodology for estimating conditional alphas and betas and long-run alphas and betas, which are the averages of conditional alphas and betas, respectively, across time. 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 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17561.

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Date of creation: Nov 2011
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Handle: RePEc:nbr:nberwo:17561

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Citations

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Cited by:
  1. Roussanov, Nikolai, 2014. "Composition of wealth, conditioning information, and the cross-section of stock returns," Journal of Financial Economics, Elsevier, vol. 111(2), pages 352-380.
  2. 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).
  3. Andrew Ang & Dennis Kristensen, 2011. "Testing Conditional Factor Models," NBER Working Papers 17561, National Bureau of Economic Research, Inc.
  4. Dennis Kristensen, 2009. "Semiparametric Modelling and Estimation: A Selective Overview," CREATES Research Papers 2009-44, School of Economics and Management, University of Aarhus.
  5. 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.
  6. 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).
  7. 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.
  8. Brière, Marie & Ang, Andrew & Signori, Ombretta, 2012. "Inflation and Individual Equities," Economics Papers from University Paris Dauphine 123456789/7847, Paris Dauphine University.
  9. Londono Yarce, J.M., 2011. "Essays on asset pricing," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5146522, Tilburg University.
  10. 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.
  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. Baele, Lieven & Londono, Juan M., 2013. "Understanding industry betas," Journal of Empirical Finance, Elsevier, vol. 22(C), pages 30-51.
  13. Fernando M. Duarte, 2013. "Inflation risk and the cross section of stock returns," Staff Reports 621, Federal Reserve Bank of New York.
  14. 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.

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