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Time-varying coefficient estimation in SURE models. Application to portfolio management

Author

Listed:
  • Isabel Casas

    () (Basque Center for Applied Mathematics; and The University of Southern Denmark)

  • Eva Ferreira

    () (University of the Basque Country)

  • Susan Orbe

    () (University of the Basque Country)

Abstract

This paper provides a detailed analysis of the asymptotic properties of a kernel estimator for a Seemingly Unrelated Regression Equations model with time-varying coefficients (tv-SURE) under very general conditions. Theoretical results together with a simulation study differentiates the cases for which the estimation of a tv-SURE outperforms the estimation of a Single Regression Equations model with time-varying coefficients (tv-SRE). The study shows that Zellner's results cannot be straightforwardly extended to the time-varying case. The tv-SURE is applied to the Fama and French five-factor model using data from four different international markets. Finally, we provide the estimation under cross-restriction and discuss a testing procedure.

Suggested Citation

  • Isabel Casas & Eva Ferreira & Susan Orbe, 0310. "Time-varying coefficient estimation in SURE models. Application to portfolio management," CREATES Research Papers 2017-33, Department of Economics and Business Economics, Aarhus University.
  • Handle: RePEc:aah:create:2017-33
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    File URL: ftp://ftp.econ.au.dk/creates/rp/17/rp17_33.pdf
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    References listed on IDEAS

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    1. Ang, Andrew & Kristensen, Dennis, 2012. "Testing conditional factor models," Journal of Financial Economics, Elsevier, vol. 106(1), pages 132-156.
    2. Aretz, Kevin & Bartram, Söhnke M. & Pope, Peter F., 2010. "Macroeconomic risks and characteristic-based factor models," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1383-1399, June.
    3. Fama, Eugene F. & French, Kenneth R., 2017. "International tests of a five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 123(3), pages 441-463.
    4. Novy-Marx, Robert, 2013. "The other side of value: The gross profitability premium," Journal of Financial Economics, Elsevier, vol. 108(1), pages 1-28.
    5. Fama, Eugene F. & French, Kenneth R., 2015. "A five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 116(1), pages 1-22.
    6. Eva Ferreira, 2004. "Beyond Single-Factor Affine Term Structure Models," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 2(4), pages 565-591.
    7. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    8. Phillips, Peter C.B. & Li, Degui & Gao, Jiti, 2017. "Estimating smooth structural change in cointegration models," Journal of Econometrics, Elsevier, vol. 196(1), pages 180-195.
    9. Henderson, Daniel J. & Kumbhakar, Subal C. & Li, Qi & Parmeter, Christopher F., 2015. "Smooth coefficient estimation of a seemingly unrelated regression," Journal of Econometrics, Elsevier, vol. 189(1), pages 148-162.
    10. Orbe, Susan & Ferreira, Eva & Rodriguez-Poo, Juan, 2003. "An algorithm to estimate time-varying parameter SURE models under different types of restriction," Computational Statistics & Data Analysis, Elsevier, vol. 42(3), pages 363-383, March.
    11. Orbe, Susan & Ferreira, Eva & Rodriguez-Poo, Juan, 2005. "Nonparametric estimation of time varying parameters under shape restrictions," Journal of Econometrics, Elsevier, vol. 126(1), pages 53-77, May.
    12. M. V. Esteban & E. Ferreira & S. Orbe-Mandaluniz, 2015. "Nonparametric methods for estimating and testing for constant betas in asset pricing models," Applied Economics, Taylor & Francis Journals, vol. 47(25), pages 2577-2607, May.
    13. Tomohiro Ando & Jushan Bai, 2015. "Asset Pricing with a General Multifactor Structure," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 13(3), pages 556-604.
    14. Cai, Zongwu, 2007. "Trending time-varying coefficient time series models with serially correlated errors," Journal of Econometrics, Elsevier, vol. 136(1), pages 163-188, January.
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    16. Ferreira, Eva & Gil-Bazo, Javier & Orbe, Susan, 2011. "Conditional beta pricing models: A nonparametric approach," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3362-3382.
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    Cited by:

    1. Isabel Casas & Xiuping Mao & Helena Veiga, 0503. "Reexamining financial and economic predictability with new estimators of realized variance and variance risk premium," CREATES Research Papers 2018-10, Department of Economics and Business Economics, Aarhus University.

    More about this item

    Keywords

    Time-varying; Nonparametric; SURE; Five factor model; Asset pricing;

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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