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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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Publication status: published as Ang, Andrew & Kristensen, Dennis, 2012. "Testing conditional factor models," Journal of Financial Economics, Elsevier, vol. 106(1), pages 132-156.
Handle: RePEc:nbr:nberwo:17561

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Cited by:
  1. Baele, Lieven & Londono, Juan M., 2013. "Understanding industry betas," Journal of Empirical Finance, Elsevier, Elsevier, vol. 22(C), pages 30-51.
  2. Roussanov, Nikolai, 2014. "Composition of wealth, conditioning information, and the cross-section of stock returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 111(2), pages 352-380.
  3. 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.
  4. 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.
  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. Dennis Kristensen & Andrew Ang, 2009. "Testing Conditional Factor Models," CREATES Research Papers 2009-09, School of Economics and Management, University of Aarhus.
  7. Dennis Kristensen, 2009. "Semiparametric Modelling and Estimation: A Selective Overview," CREATES Research Papers 2009-44, School of Economics and Management, University of Aarhus.
  8. 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.).
  9. 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.
  10. 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.
  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. 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.
  13. Andrew Ang & Marie Brière & Ombretta Signori, 2012. "Inflation and Individual Equities," NBER Working Papers 17798, National Bureau of Economic Research, Inc.
  14. 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.
  15. 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.
  16. Londono Yarce, J.M., 2011. "Essays on asset pricing," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5146522, Tilburg University.
  17. 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.
  18. 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).
  19. 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.

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