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Tests of asset pricing with time-varying factor loads

Tests of asset pricing with time-varying factor loads
Tests of asset pricing with time-varying factor loads
This paper proposes an empirical asset pricing test based on the homogeneity of the factor risk premia across risky assets. Factor loadings are considered to be dynamic and estimated from data at higher frequencies. The factor risk premia are obtained as estimates from time series regressions applied to each risky asset. We propose Swamy-type tests robust to the presence of generated regressors and dependence between the pricing errors to assess the homogeneity of the factor risk premia and the zero intercept hypothesis. An application to US industry portfolios shows overwhelming evidence rejecting the CAPM, and the three and fl ve factor models developed by Fama and French (1993, 2015). In particular, we reject the null hypotheses of a zero intercept, homogeneous factor risk premia across risky assets and the joint test involving
both hypotheses.
0883-7252
1-34
Galvao, Antonio F.
6f2af55a-e340-404e-a787-cb2f90c87ebd
Montes-Rojas, Gabriel
69548d5d-9e1f-4f6c-8453-6c2675b8dc21
Olmo, Jose
706f68c8-f991-4959-8245-6657a591056e
Galvao, Antonio F.
6f2af55a-e340-404e-a787-cb2f90c87ebd
Montes-Rojas, Gabriel
69548d5d-9e1f-4f6c-8453-6c2675b8dc21
Olmo, Jose
706f68c8-f991-4959-8245-6657a591056e

Galvao, Antonio F., Montes-Rojas, Gabriel and Olmo, Jose (2019) Tests of asset pricing with time-varying factor loads. Journal of Applied Econometrics, 1-34. (doi:10.1002/jae.2687).

Record type: Article

Abstract

This paper proposes an empirical asset pricing test based on the homogeneity of the factor risk premia across risky assets. Factor loadings are considered to be dynamic and estimated from data at higher frequencies. The factor risk premia are obtained as estimates from time series regressions applied to each risky asset. We propose Swamy-type tests robust to the presence of generated regressors and dependence between the pricing errors to assess the homogeneity of the factor risk premia and the zero intercept hypothesis. An application to US industry portfolios shows overwhelming evidence rejecting the CAPM, and the three and fl ve factor models developed by Fama and French (1993, 2015). In particular, we reject the null hypotheses of a zero intercept, homogeneous factor risk premia across risky assets and the joint test involving
both hypotheses.

Text
GMRO JAEcon rev3 - Accepted Manuscript
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Text
Online Appendix published version
Restricted to Repository staff only until 16 January 2021.
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More information

Accepted/In Press date: 21 December 2018
e-pub ahead of print date: 16 January 2019

Identifiers

Local EPrints ID: 427708
URI: https://eprints.soton.ac.uk/id/eprint/427708
ISSN: 0883-7252
PURE UUID: 566a7db6-f00d-4118-adb6-1a88bc0cb749

Catalogue record

Date deposited: 25 Jan 2019 17:30
Last modified: 19 Jul 2019 16:44

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