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Factor models of stock returns: GARCH errors versus time-varying betas

Author

Listed:
  • Koundouri, Phoebe
  • Kourogenis, Nikolaos
  • Pittis, Nikitas
  • Samartzis, Panagiotis

Abstract

This paper investigates the implications of time-varying betas in factor models for stock returns. It is shown that a single-factor model (SFMT) with autoregressive betas and homoscedastic errors (SFMT-AR) is capable of reproducing the most important stylized facts of stock returns. An empirical study on the major US stock market sectors shows that SFMT-AR outperforms, in terms of in-sample and out-of-sample performance, SFMT with constant betas and conditionally heteroscedastic (GARCH) errors, as well as two multivariate GARCH-type models.

Suggested Citation

  • Koundouri, Phoebe & Kourogenis, Nikolaos & Pittis, Nikitas & Samartzis, Panagiotis, 2016. "Factor models of stock returns: GARCH errors versus time-varying betas," LSE Research Online Documents on Economics 65548, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:65548
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    File URL: https://researchonline.lse.ac.uk/id/eprint/65548/
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    Cited by:

    1. Blasques, F. & Francq, Christian & Laurent, Sébastien, 2024. "Autoregressive conditional betas," Journal of Econometrics, Elsevier, vol. 238(2).
    2. Lioui, Abraham & Tarelli, Andrea, 2020. "Factor Investing for the Long Run," Journal of Economic Dynamics and Control, Elsevier, vol. 117(C).

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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • 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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