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Long- and Short-Run Components of Factor Betas: Implications for Equity Pricing

Author

Listed:
  • Hossein Asgharian

    (Lund University)

  • Charlotte Christiansen

    (Aarhus University and CREATES)

  • Ai Jun Hou

    (Stockholm Business School)

  • Weining Wang

    (City University of London)

Abstract

We suggest a bivariate component GARCH model that simultaneously obtains factor betas’ long- and short-run components. We apply this new model to industry portfolios using market, small-minus-big, and high-minus-low portfolios as risk factors and find that the cross-sectional average and dispersion of the betas’ short-run component increase in bad states of the economy. Our analysis of the risk premium highlights the importance of decomposing risk across horizons: The risk premium associated with the short-run market beta is significantly positive. This is robust to the portfolio-set choice.

Suggested Citation

  • Hossein Asgharian & Charlotte Christiansen & Ai Jun Hou & Weining Wang, 2017. "Long- and Short-Run Components of Factor Betas: Implications for Equity Pricing," CREATES Research Papers 2017-34, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2017-34
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    References listed on IDEAS

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    More about this item

    Keywords

    long-run betas; short-run betas; risk premia; component GARCH model; MIDAS;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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