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Uncertainty and the Dynamics of Multifactor Loadings and Pricing Errors

Author

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  • Carmine Trecroci

    () (University of Brescia)

Abstract

This paper considers an environment where investors have limited knowledge of true systematic risks and therefore continuously re-estimate the forecasting model that they use to form expectations. Based on a parsimonious specification with learning and no conditioning information, I extract time-varying factor loadings, pricing errors, and a measure of pricing uncertainty for the Fama-French three-factor model. Estimated parameters display significant fluctuations over time, both short-run and long-term, along patterns that vary across industry portfolios. Besides being markedly variable across portfolios and over time, abnormal returns and risk loadings also display strong systematic correlations with market conditions and business-cycle developments. Overall, the estimates convey the idea that over the past two decades stocks have experienced a pervasive increase in the variability of their exposure to fundamental risks.

Suggested Citation

  • Carmine Trecroci, 2012. "Uncertainty and the Dynamics of Multifactor Loadings and Pricing Errors," Economics Bulletin, AccessEcon, vol. 32(3), pages 2453-2463.
  • Handle: RePEc:ebl:ecbull:eb-12-00626
    as

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    References listed on IDEAS

    as
    1. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
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    3. Lewellen, Jonathan & Nagel, Stefan, 2006. "The conditional CAPM does not explain asset-pricing anomalies," Journal of Financial Economics, Elsevier, vol. 82(2), pages 289-314, November.
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    More about this item

    Keywords

    Multifactor models; Time-varying alphas; Time-varying betas; Pricing errors;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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