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Estimating the Volatility of Asset Pricing Factors

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  • Becker, Janis
  • Leschinski, Christian

Abstract

Models based on factors such as size, value, or momentum are ubiquitous in asset pricing. Therefore, portfolio allocation and risk management require estimates of the volatility of these factors. While realized volatility has become a standard tool for liquid individual assets, this measure is not available for factor models, due to their construction from the CRSP data base that does not provide high frequency data and contains a large number of less liquid stocks. Here, we provide a statistical approach to estimate the volatility of these factors. The efficacy of this approach relative to the use of models based on squared returns is demonstrated for forecasts of the market volatility and a portfolio allocation strategy that is based on volatility timing.

Suggested Citation

  • Becker, Janis & Leschinski, Christian, 2018. "Estimating the Volatility of Asset Pricing Factors," Hannover Economic Papers (HEP) dp-631, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    • Handle: RePEc:han:dpaper:dp-631
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    Cited by:

    1. Liu, Jing & Chen, Zhonglu, 2023. "How do stock prices respond to the leading economic indicators? Analysis of large and small shocks," Finance Research Letters, Elsevier, vol. 51(C).

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    More about this item

    Keywords

    Asset Pricing; Realized Volatility; Factor Models; Volatility Forecasting;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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