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Testing Conditional Factor Models

  • Dennis Kristensen

    ()

    (Columbia University and CREATES)

  • Andrew Ang

    ()

    (Columbia University and NBER)

We develop a new methodology for estimating time-varying factor loadings and conditional alphas based on nonparametric techniques. We test whether long-run alphas, or averages of conditional alphas over the sample, are equal to zero and derive test statistics for the constancy of factor loadings. 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 when there is no time variation in the factor loadings. As applications of the methodology, we estimate conditional CAPM and Fama and French (1993) 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 School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2009-09.

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Length: 47
Date of creation: 04 Mar 2009
Date of revision:
Handle: RePEc:aah:create:2009-09
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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