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Regression Based Estimation of Dynamic Asset Pricing Models

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  • Adrian, Tobias
  • Crump, Richard K.
  • Moench, Emanuel

Abstract

We propose regression based estimators for beta representations of dynamic asset pricing models with an affine pricing kernel specification. We allow for state variables that are cross sectional pricing factors, forecasting variables for the price of risk, and factors that are both. The estimators explicitly allow for time varying prices of risk, time varying betas and serially dependent pricing factors. Our approach nests the Fama-MacBeth two-pass estimator as a special case. We provide asymptotic multistage standard errors necessary to conduct inference for asset pricing tests. We illustrate our new estimators in an application to the joint pricing of stocks and bonds. The application features strongly time varying, highly significant prices of risk which are found to be quantitatively more important than time varying betas in reducing pricing errors.

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  • Adrian, Tobias & Crump, Richard K. & Moench, Emanuel, 2015. "Regression Based Estimation of Dynamic Asset Pricing Models," CEPR Discussion Papers 10449, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10449
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    Keywords

    Dynamic Asset Pricing; Fama-MacBeth Regressions; GMM; Minimum Distance Estimation; Reduced Rank Regression; Time-varying Betas;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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