IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Factor Models of Stock Returns: GARCH Errors versus Autoregressive Betas

  • Panagiotis Samartzis
  • Nikitas Pittis

    ()

    (University of Piraeus, Greece)

  • Nikolaos Kourogenis

    ()

    (Department of Banking and Financial Management, University of Piraeus.)

  • Phoebe Koundouri

The Single Factor Model (SFMT) of stock returns in its simplest form, namely the one that assumes time-invariant beta and homoskedastic error has been found to be empirically inadequate.The beta coefficient and the error process exhibit signi��cant time-variation and dynamic conditional heteroskedasticity, respectively. Out of these empirical failures, two extended versions of SFMT have emerged: the ��first (SFMT-AR) assumes that the beta coefficient is an autoregressive process, whereas the second (SFMT-GARCH) maintains the assumption of time-invariant beta but assumes that the error follows a GARCH process. The purpose of this paper is twofold: fi��rst to show that SFMT-AR is capable of reproducing the most important stylized facts of stock returns, namely conditional heteroskedasticity and leptokurtosis, even in the case in which the factor is an independent process; second to compare SFMT-GARCH and SFMT-AR in terms of their in-sample and out-of-sample performance. The most important result from these comparisons is that SFMT-AR dominates SFMT-GARCH in terms of forecasting the second moments of stock returns.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://wpa.deos.aueb.gr/docs/Factor.Models.of.Stock.Returns.pdf
File Function: First version
Download Restriction: no

Paper provided by Athens University of Economics and Business in its series DEOS Working Papers with number 1318.

as
in new window

Length:
Date of creation:
Date of revision:
Handle: RePEc:aue:wpaper:1318
Contact details of provider: Postal:
76, Patission Street, Athens 104 34

Phone: (+301) 8214021
Fax: (301) 8214021
Web page: http://deos.aueb.gr/

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Wu, Jin, 2005. "A framework for exploring the macroeconomic determinants of systematic risk," CFS Working Paper Series 2005/04, Center for Financial Studies (CFS).
  2. Clark, Peter K, 1973. "A Subordinated Stochastic Process Model with Finite Variance for Speculative Prices," Econometrica, Econometric Society, vol. 41(1), pages 135-55, January.
  3. Ang, Andrew & Chen, Joseph, 2007. "CAPM over the long run: 1926-2001," Journal of Empirical Finance, Elsevier, vol. 14(1), pages 1-40, January.
  4. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-31, February.
  5. Mankiw, N.G. & Romer, D. & Shapiro, M.D., 1989. "Stock Market Forecastability And Volatility: A Statistical Appraisal," Papers 89-21, Michigan - Center for Research on Economic & Social Theory.
  6. Collins, Daniel W & Ledolter, Johannes & Rayburn, Judy Dawson, 1987. "Some Further Evidence on the Stochastic Properties of Systematic Risk," The Journal of Business, University of Chicago Press, vol. 60(3), pages 425-48, July.
  7. Castanias, Richard P, II, 1979. "Macroinformation and the Variability of Stock Market Prices," Journal of Finance, American Finance Association, vol. 34(2), pages 439-50, May.
  8. Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," The Journal of Business, University of Chicago Press, vol. 36, pages 394.
  9. Jostova, Gergana & Philipov, Alexander, 2005. "Bayesian Analysis of Stochastic Betas," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(04), pages 747-778, December.
  10. Petkova, Ralitsa & Zhang, Lu, 2005. "Is value riskier than growth?," Journal of Financial Economics, Elsevier, vol. 78(1), pages 187-202, October.
  11. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2001. "Modeling and Forecasting Realized Volatility," Center for Financial Institutions Working Papers 01-01, Wharton School Center for Financial Institutions, University of Pennsylvania.
  12. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 246-73, April.
  13. Schwartz, Robert A & Whitcomb, David K, 1977. "The Time-Variance Relationship: Evidence on Autocorrelation in Common Stock Returns," Journal of Finance, American Finance Association, vol. 32(1), pages 41-55, March.
  14. Bali, Turan G. & Mo, Hengyong & Tang, Yi, 2008. "The role of autoregressive conditional skewness and kurtosis in the estimation of conditional VaR," Journal of Banking & Finance, Elsevier, vol. 32(2), pages 269-282, February.
  15. Lim, Kian-Guan, 1989. "A New Test of the Three-Moment Capital Asset Pricing Model," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(02), pages 205-216, June.
  16. James M. Poterba & Lawrence H. Summers, 1987. "Mean Reversion in Stock Prices: Evidence and Implications," NBER Working Papers 2343, National Bureau of Economic Research, Inc.
  17. Praetz, Peter D, 1972. "The Distribution of Share Price Changes," The Journal of Business, University of Chicago Press, vol. 45(1), pages 49-55, January.
  18. Madan, Dilip B & Seneta, Eugene, 1990. "The Variance Gamma (V.G.) Model for Share Market Returns," The Journal of Business, University of Chicago Press, vol. 63(4), pages 511-24, October.
  19. Ohlson, James & Rosenberg, Barr, 1982. "Systematic Risk of the CRSP Equal-weighted Common Stock Index: A History Estimated by Stochastic-Parameter Regression," The Journal of Business, University of Chicago Press, vol. 55(1), pages 121-45, January.
  20. N. Gregory Mankiw & David Romer & Matthew D. Shapiro, 1991. "Stock Market Forecastability and Volatility: A Statistical Appraisal," Review of Economic Studies, Oxford University Press, vol. 58(3), pages 455-477.
  21. Hagerman, Robert L, 1978. "More Evidence on the Distribution of Security Returns," Journal of Finance, American Finance Association, vol. 33(4), pages 1213-21, September.
  22. Richardson, Matthew & Stock, James H., 1989. "Drawing inferences from statistics based on multiyear asset returns," Journal of Financial Economics, Elsevier, vol. 25(2), pages 323-348, December.
  23. Upton, David E & Shannon, Donald S, 1979. "The Stable Paretian Distribution, Subordinated Stochastic Processes, and Asymptotic Lognormality: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 34(4), pages 1031-39, September.
  24. McQueen, Grant, 1992. "Long-Horizon Mean-Reverting Stock Prices Revisited," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(01), pages 1-18, March.
  25. Sunder, Shyam, 1980. " Stationarity of Market Risk: Random Coefficients Tests for Individual Stocks," Journal of Finance, American Finance Association, vol. 35(4), pages 883-96, September.
  26. Shanken, Jay, 1990. "Intertemporal asset pricing : An Empirical Investigation," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 99-120.
  27. Bos, T & Newbold, P, 1984. "An Empirical Investigation of the Possibility of Stochastic Systematic Risk in the Market Model," The Journal of Business, University of Chicago Press, vol. 57(1), pages 35-41, January.
  28. Fabozzi, Frank J. & Francis, Jack Clark, 1978. "Beta as a Random Coefficient," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 13(01), pages 101-116, March.
  29. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
  30. Kraus, Alan & Litzenberger, Robert H, 1976. "Skewness Preference and the Valuation of Risk Assets," Journal of Finance, American Finance Association, vol. 31(4), pages 1085-1100, September.
  31. Blume, Marshall E, 1971. "On the Assessment of Risk," Journal of Finance, American Finance Association, vol. 26(1), pages 1-10, March.
  32. Harvey, Campbell R. & Siddique, Akhtar, 1999. "Autoregressive Conditional Skewness," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(04), pages 465-487, December.
  33. Doron Avramov & Tarun Chordia, 2006. "Asset Pricing Models and Financial Market Anomalies," Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 1001-1040.
  34. Beja, Avraham, 1972. "On Systematic and Unsystematic Components of Financial Risk," Journal of Finance, American Finance Association, vol. 27(1), pages 37-45, March.
  35. Fred D. Arditti, 1967. "Risk And The Required Return On Equity," Journal of Finance, American Finance Association, vol. 22(1), pages 19-36, 03.
  36. Kon, Stanley J & Jen, Frank C, 1978. "Estimation of Time-Varying Systematic Risk and Performance for Mutual Fund Portfolios: An Application of Switching Regression," Journal of Finance, American Finance Association, vol. 33(2), pages 457-75, May.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:aue:wpaper:1318. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekaterini Glynou)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.