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Estimating and testing beta pricing models on industries

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  • Hammami, Yacine
  • Lindahl, Anna

Abstract

This paper uses the betas of book-to-market portfolios as proxies for systematic risks of industries instead of the individual betas computed from individual time-series regressions. Our empirical specification improves both the precision of the beta estimates and the cost of equity estimates. Estimating and testing beta pricing models via the proposed method highlights that consumption growth, liquidity risk, market excess returns, and the value factor explain the cross-sectional differences in expected industry returns, while there are no significant risk factors using the traditional approach. The fact that consumption risk is priced with monthly data is an interesting result, as the financial literature has struggled to prove that the consumption capital asset pricing model explains monthly returns.

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  • Hammami, Yacine & Lindahl, Anna, 2013. "Estimating and testing beta pricing models on industries," Journal of Economics and Business, Elsevier, vol. 69(C), pages 45-63.
    • Handle: RePEc:eee:jebusi:v:69:y:2013:i:c:p:45-63
    DOI: 10.1016/j.jeconbus.2013.05.003
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    More about this item

    Keywords

    Asset pricing models; Systematic risk; Cost of equity; Consumption risk; Two-pass cross-sectional regressions;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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