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Testing conditional factor models: A nonparametric approach

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  • Li, Yan
  • Yang, Liyan

Abstract

Some recent studies of conditional factor models do not specify conditioning information but use data from small windows to estimate the time series of conditional alphas and betas. In this paper, we propose a nonparametric method using an optimal window to estimate time-varying coefficients. In addition, we offer two empirical tests of a conditional factor model. Using our new method, we examine the performance of the conditional CAPM and the conditional Fama–French three-factor model in explaining the return variations of portfolios sorted by size, book-to-market ratios, and past returns, for which recent literature has generated controversial results. We find that, although in general the conditional FF model outperforms the conditional CAPM, both models fail to explain well-known asset-pricing anomalies. Moreover, for both models, the failure is more pronounced for the equally-weighted portfolios than for the value-weighted ones.

Suggested Citation

  • Li, Yan & Yang, Liyan, 2011. "Testing conditional factor models: A nonparametric approach," Journal of Empirical Finance, Elsevier, vol. 18(5), pages 972-992.
  • Handle: RePEc:eee:empfin:v:18:y:2011:i:5:p:972-992
    DOI: 10.1016/j.jempfin.2011.07.004
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Ang, Andrew & Kristensen, Dennis, 2012. "Testing conditional factor models," Journal of Financial Economics, Elsevier, vol. 106(1), pages 132-156.
    2. Corradi, Valentina & Distaso, Walter & Fernandes, Marcelo, 2013. "Conditional alphas and realized betas," Textos para discussão 341, FGV/EESP - Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
    3. Асатуров К.Г., 2015. "Динамические Модели Систематического Риска: Сравнение На Примере Индийского Фондового Рынка," Журнал Экономика и математические методы (ЭММ), Центральный Экономико-Математический Институт (ЦЭМИ), vol. 51(4), pages 59-75, октябрь.
    4. Yan Li & Liangjun Su & Yuewu Xu, 2015. "A Combined Approach to the Inference of Conditional Factor Models," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 33(2), pages 203-220, April.
    5. Lu, Xun & Su, Liangjun, 2015. "Jackknife model averaging for quantile regressions," Journal of Econometrics, Elsevier, vol. 188(1), pages 40-58.
    6. Sainan Jin & Liangjun Su & Yonghui Zhang, 2015. "Nonparametric testing for anomaly effects in empirical asset pricing models," Empirical Economics, Springer, vol. 48(1), pages 9-36, February.
    7. Kinnunen, Jyri, 2014. "Risk-return trade-off and serial correlation: Do volume and volatility matter?," Journal of Financial Markets, Elsevier, vol. 20(C), pages 1-19.
    8. repec:eee:empfin:v:42:y:2017:i:c:p:256-282 is not listed on IDEAS
    9. Nieto Domenech, Belén & Orbe Mandaluniz, Susan & Zárraga Alonso, Ainhoa, 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).
    10. Kinnunen, Jyri, 2013. "Dynamic return predictability in the Russian stock market," Emerging Markets Review, Elsevier, vol. 15(C), pages 107-121.

    More about this item

    Keywords

    Conditional CAPM; Conditional Fama–French three-factor model; Momentum; Nonparametric method; Size; Value;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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