Download or read book CAPM and Time Varying Beta written by Devraj Basu and published by . This book was released on 2019 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: The failure of the static-beta CAPM to explain the cross-section of returns on portfolios sorted on firm size, book-to-market ratio, momentum, and even portfolios sorted on past CAPM betas, is well documented. In this paper we show that the model's performance dramatically improves when portfolio betas are allowed to be time-varying functions of (lagged) business cycle variables. We use an approach based on Hansen and Richard (1987) to construct a candidate stochastic discount factor (SDF), using the excess return on the market portfolio as the single factor, scaled by a time-varying coeplusmn;cient. The result is a model in which the conditional factor risk premium is a non-linear function of the business cycle variables. We assess the performance of our model by computing the R2 of the cross-sectional regression of realized on model-implied expected returns, as for example in Jagannathan and Wang (1996). While this is not a formal test of the model's ability to price the assets correctly, it does provide an informative summary statistic that allows us to compare the performance of our scaled model with that of the static version, and also to compare our findings to those of other similar studies.In the post-1980 period, where the static CAPM is known to perform particularly poorly, our scaled model explains around 60% of the cross-sectional variation in returns on beta and book-to-market portfolios, and 87% for momentum portfolios. Moreover, the model captures 70% of the value premium (the return spread between the highest and lowest book-to-market decile portfolios), and 75% of the momentum premium (the spread between the past 'winner' and 'loser' portfolios). Our results thus confirm the crucial importance of time-varying risk premiums in explaining the cross-section of average returns on these sets of portfolios. Moreover, the conditional market risk premium and hence also the betas implied by our model exhibits considerable non-linearity in the business cycle instruments.

Download or read book Time Varying Betas Help in Asset Pricing written by Aslihan Altay Salih and published by . This book was released on 2006 with total page 24 pages. Available in PDF, EPUB and Kindle. Book excerpt: Although there is a consensus about time variation in market betas, it is not clear how this variation should be captured. Several researchers continue to analyze different versions of the conditional CAPM. However, Ghysels (1998) shows that these conditional CAPM models fail to capture the dynamics of beta risk. In this study, we introduce a new model, threshold CAPM, which outperforms both the conditional and unconditional CAPMs by generating smaller pricing errors. We also show that the beta risk changes through time with the changes in the economic environment and the dynamics of time variation of beta differ across industries. These findings have important implications for asset allocation, portfolio selection, and hedging decisions.

Download or read book Learning about Beta written by Groupe HEC (Jouy-en-Josas, Yvelines). Direction de la recherche and published by . This book was released on 2006 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper explores the theoretical and empirical implications of time-varying and unobservable betas. Investors infer factor loadings from the history of returns via the Kalman filter. Due to learning, the history of beta matters. Even though the conditional CAPM holds, standard OLS tests can reject the model if the evolution of investor's expectations is not properly modelled. We use our methodology to explain returns on the twenty-five size and book-to-market sorted portfolios. Our learning version of the conditional CAPM produces pricing errors that are significantly smaller than standard conditional or unconditional CAPM and the model is not rejected by the data.

Download or read book Learning about Beta Time varying Factor Loadings Expected Returns and the Conditional CAPM written by Tobias Adrian and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Recent Econometric Techniques for Macroeconomic and Financial Data written by Gilles Dufrénot and published by Springer Nature. This book was released on 2020-11-21 with total page 387 pages. Available in PDF, EPUB and Kindle. Book excerpt: The book provides a comprehensive overview of the latest econometric methods for studying the dynamics of macroeconomic and financial time series. It examines alternative methodological approaches and concepts, including quantile spectra and co-spectra, and explores topics such as non-linear and non-stationary behavior, stochastic volatility models, and the econometrics of commodity markets and globalization. Furthermore, it demonstrates the application of recent techniques in various fields: in the frequency domain, in the analysis of persistent dynamics, in the estimation of state space models and new classes of volatility models. The book is divided into two parts: The first part applies econometrics to the field of macroeconomics, discussing trend/cycle decomposition, growth analysis, monetary policy and international trade. The second part applies econometrics to a wide range of topics in financial economics, including price dynamics in equity, commodity and foreign exchange markets and portfolio analysis. The book is essential reading for scholars, students, and practitioners in government and financial institutions interested in applying recent econometric time series methods to financial and economic data.

Download or read book Econometrics for Financial Applications written by Ly H. Anh and published by Springer. This book was released on 2017-12-18 with total page 1089 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book addresses both theoretical developments in and practical applications of econometric techniques to finance-related problems. It includes selected edited outcomes of the International Econometric Conference of Vietnam (ECONVN2018), held at Banking University, Ho Chi Minh City, Vietnam on January 15-16, 2018. Econometrics is a branch of economics that uses mathematical (especially statistical) methods to analyze economic systems, to forecast economic and financial dynamics, and to develop strategies for achieving desirable economic performance. An extremely important part of economics is finances: a financial crisis can bring the whole economy to a standstill and, vice versa, a smart financial policy can dramatically boost economic development. It is therefore crucial to be able to apply mathematical techniques of econometrics to financial problems. Such applications are a growing field, with many interesting results – and an even larger number of challenges and open problems.

Download or read book The CAPM with time varying covariances written by Sebastian Wilde and published by GRIN Verlag. This book was released on 2022-08-31 with total page 29 pages. Available in PDF, EPUB and Kindle. Book excerpt: Seminar paper from the year 2021 in the subject Economics - Finance, grade: 1,3, University of Hagen (Fakultät für Wirtschaftswissenschaft, Lehrstuhl für Angewandte Statistik), language: English, abstract: The CAPM provides a single state, single factor, general equilibrium theory of the risk-return relation. However, in the 1960s, Mandelbrot (1963) already observed stock returns to have a very peaked distribution with heavy tails and also periods of persistent volatility, which contradicts the CAPM. In response to these observations, the Conditional CAPM (C-CAPM) has been discussed by several authors. In a C-CAPM investors can price an asset or portfolio conditional on the available information at a point in time. This is done by replacing the unconditional by conditional moments of returns. Statistically, processes of ”Generalized Autoregressive Conditional Heteroscedasticity” (GARCH) can capture the so called ”stylized facts”, some observed by Mandelbrot (1963). GARCH models were developed by Engle (1982) and Bollerslev (1986) and try to model time-varying second moments of asset returns. If a GARCH process is assumed for the disturbance term in a C-CAPM, a GARCH-in mean model (GARCH-M) can be estimated, where the conditional variance or covariance impacts the conditional expectation of (excess) returns. The GARCH-M can model time-varying conditional moments, but also time-varying risk premia and the implied beta factor. As for this seminar paper, I mostly follow the comprehensive dissertation ”Das CAPM mit zeitabhängigen Beta-Faktoren” of Linnenbrink (1998) and the paper of Bollerslev et al. (1988). First, the theoretical foundations of the CAPM, the C-CAPM, GARCH processes and the GARCH-M extension are presented. Then, in the empirical part, I estimate a (univariate) GARCH-M representation of the C-CAPM. I compare its performance to a traditional CAPM with a single stock portfolio of an investor (selected stock: Tesla, Inc.).

Download or read book Learning about Beta written by and published by . This book was released on 2004 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: "When risk-factor loadings are time-varying and unobservable, investors are forced to form beliefs about the levels of their loadings. The learning process involved in forming these beliefs has normative implications for asset-pricing tests. This paper develops an equilibrium model of learning about time-varying beta. In the model, the capital asset pricing model (CAPM) works for investors' probability distribution. However, mis-pricing can be observed if econometricians estimate betas without accounting for the investors' learning process. The empirical implication for asset-pricing tests is that the factor loadings must be estimated as latent variables. We provide an empirical application of this methodology to the cross section of returns on ten book-to-market and ten size-sorted portfolios. For these assets, the data do not reject a learning-augmented version of CAPM. This model performs better than other common empirical specifications, including the Fama-French three-factor model"--Federal Reserve Bank of New York web site.

Download or read book Intermediate Financial Theory written by Jean-Pierre Danthine and published by Elsevier. This book was released on 2005-07-25 with total page 391 pages. Available in PDF, EPUB and Kindle. Book excerpt: The second edition of this authoritative textbook continues the tradition of providing clear and concise descriptions of the new and classic concepts in financial theory. The authors keep the theory accessible by requiring very little mathematical background. First edition published by Prentice-Hall in 2001- ISBN 0130174467. The second edition includes new structure emphasizing the distinction between the equilibrium and the arbitrage perspectives on valuation and pricing, as well as a new chapter on asset management for the long term investor. "This book does admirably what it sets out to do - provide a bridge between MBA-level finance texts and PhD-level texts.... many books claim to require little prior mathematical training, but this one actually does so. This book may be a good one for Ph.D students outside finance who need some basic training in financial theory or for those looking for a more user-friendly introduction to advanced theory. The exercises are very good." --Ian Gow, Student, Graduate School of Business, Stanford University Completely updated edition of classic textbook that fills a gap between MBA level texts and PHD level texts Focuses on clear explanations of key concepts and requires limited mathematical prerequisites Updates includes new structure emphasizing the distinction between the equilibrium and the arbitrage perspectives on valuation and pricing, as well as a new chapter on asset management for the long term investor

Download or read book On Stable Factor Structures in the Pricing of Risk written by Eric Ghysels and published by . This book was released on 2012 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: There is now considerable evidence suggesting that estimated betas of unconditional CAPM models exhibit statistically significant time variation. Therefore, many have advocated the use of conditional CAPM models. If we succeed in capturing the dynamics of beta risk, we are sure to outperform constant beta models. However, if the beta risk is inherently misspecified there is a real possibility that we commit serious pricing errors, potentially larger than with a constant traditional beta model. In this paper we show that this is indeed the case, namely that pricing errors with constant traditional beta models are smaller than with conditional CAPM models.

Download or read book Time Varying Beta and the Value Premium written by Hui Guo and published by . This book was released on 2015 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: We revisit conditional CAPM by modeling alpha and beta as flexible functions of state variables identified via formal variable selection. In post-1963 sample, beta of the value premium comoves strongly with unemployment, inflation, and price-earnings ratio in a countercyclical manner. We also uncover a novel nonlinear dependence of alpha on business conditions: It falls sharply and becomes even negative during severe economic downturns but is positive and flat otherwise. Conditional CAPM performs better than unconditional CAPM but does not fully explain the value premium. Our findings are consistent with a conditional CAPM with rare disasters or a multi-factor model.

Download or read book Global Analysis of Dynamic Models in Economics and Finance written by Gian Italo Bischi and published by Springer Science & Business Media. This book was released on 2012-08-07 with total page 449 pages. Available in PDF, EPUB and Kindle. Book excerpt: The essays in this special volume survey some of the most recent advances in the global analysis of dynamic models for economics, finance and the social sciences. They deal in particular with a range of topics from mathematical methods as well as numerous applications including recent developments on asset pricing, heterogeneous beliefs, global bifurcations in complementarity games, international subsidy games and issues in economic geography. A number of stochastic dynamic models are also analysed. The book is a collection of essays in honour of the 60th birthday of Laura Gardini.​

Download or read book Cointegration Causality and Forecasting written by Halbert White and published by Oxford University Press, USA. This book was released on 1999 with total page 512 pages. Available in PDF, EPUB and Kindle. Book excerpt: A collection of essays in honour of Clive Granger. The chapters are by some of the world's leading econometricians, all of whom have collaborated with and/or studied with both) Clive Granger. Central themes of Granger's work are reflected in the book with attention to tests for unit roots and cointegration, tests of misspecification, forecasting models and forecast evaluation, non-linear and non-parametric econometric techniques, and overall, a careful blend of practical empirical work and strong theory. The book shows the scope of Granger's research and the range of the profession that has been influenced by his work.

Download or read book Encyclopedia of Finance written by Cheng-Few Lee and published by Springer Science & Business Media. This book was released on 2006-07-27 with total page 861 pages. Available in PDF, EPUB and Kindle. Book excerpt: This is a major new reference work covering all aspects of finance. Coverage includes finance (financial management, security analysis, portfolio management, financial markets and instruments, insurance, real estate, options and futures, international finance) and statistical applications in finance (applications in portfolio analysis, option pricing models and financial research). The project is designed to attract both an academic and professional market. It also has an international approach to ensure its maximum appeal. The Editors' wish is that the readers will find the encyclopedia to be an invaluable resource.

Download or read book Empirical Asset Pricing written by Wayne Ferson and published by MIT Press. This book was released on 2019-03-12 with total page 497 pages. Available in PDF, EPUB and Kindle. Book excerpt: An introduction to the theory and methods of empirical asset pricing, integrating classical foundations with recent developments. This book offers a comprehensive advanced introduction to asset pricing, the study of models for the prices and returns of various securities. The focus is empirical, emphasizing how the models relate to the data. The book offers a uniquely integrated treatment, combining classical foundations with more recent developments in the literature and relating some of the material to applications in investment management. It covers the theory of empirical asset pricing, the main empirical methods, and a range of applied topics. The book introduces the theory of empirical asset pricing through three main paradigms: mean variance analysis, stochastic discount factors, and beta pricing models. It describes empirical methods, beginning with the generalized method of moments (GMM) and viewing other methods as special cases of GMM; offers a comprehensive review of fund performance evaluation; and presents selected applied topics, including a substantial chapter on predictability in asset markets that covers predicting the level of returns, volatility and higher moments, and predicting cross-sectional differences in returns. Other chapters cover production-based asset pricing, long-run risk models, the Campbell-Shiller approximation, the debate on covariance versus characteristics, and the relation of volatility to the cross-section of stock returns. An extensive reference section captures the current state of the field. The book is intended for use by graduate students in finance and economics; it can also serve as a reference for professionals.

Download or read book Asset Pricing written by John H. Cochrane and published by Princeton University Press. This book was released on 2009-04-11 with total page 560 pages. Available in PDF, EPUB and Kindle. Book excerpt: Winner of the prestigious Paul A. Samuelson Award for scholarly writing on lifelong financial security, John Cochrane's Asset Pricing now appears in a revised edition that unifies and brings the science of asset pricing up to date for advanced students and professionals. Cochrane traces the pricing of all assets back to a single idea--price equals expected discounted payoff--that captures the macro-economic risks underlying each security's value. By using a single, stochastic discount factor rather than a separate set of tricks for each asset class, Cochrane builds a unified account of modern asset pricing. He presents applications to stocks, bonds, and options. Each model--consumption based, CAPM, multifactor, term structure, and option pricing--is derived as a different specification of the discounted factor. The discount factor framework also leads to a state-space geometry for mean-variance frontiers and asset pricing models. It puts payoffs in different states of nature on the axes rather than mean and variance of return, leading to a new and conveniently linear geometrical representation of asset pricing ideas. Cochrane approaches empirical work with the Generalized Method of Moments, which studies sample average prices and discounted payoffs to determine whether price does equal expected discounted payoff. He translates between the discount factor, GMM, and state-space language and the beta, mean-variance, and regression language common in empirical work and earlier theory. The book also includes a review of recent empirical work on return predictability, value and other puzzles in the cross section, and equity premium puzzles and their resolution. Written to be a summary for academics and professionals as well as a textbook, this book condenses and advances recent scholarship in financial economics.

Download or read book Conditional Beta Estimation and Forecasting with Panel Data Methods written by Michelle L. Barnes and published by . This book was released on 2005 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: Standard approaches to the estimation and testing of conditional CAPM models with time-varying or random beta have ignored the potential panel nature of financial data. We test for whether or not homogeneity restrictions on the time-variation component of multifactor betas and on the slope parameters for the conditioning variables can be rejected. We find that such homogeneity restrictions are not rejected, and show that there are resultant benefits for testing conditional CAPM and forecasting expected returns and beta. Further, this panel approach yields more precise parameter estimates, and a greater understanding of the significance of both conditional variables and multi-factors.