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Modelling Sector-Level Asset Prices

Author

Listed:
  • Daniel J. Tulloch

    (Smith School of Enterprise and the Environment, University of Oxford, South Parks Road, Oxford OX1 3QY, UK)

  • Ivan Diaz-Rainey

    (Department of Accountancy & Finance, University of Otago, P.O. Box 56, Dunedin 9054, New Zealand)

  • I. M. Premachandra

    (Department of Accountancy & Finance, University of Otago, P.O. Box 56, Dunedin 9054, New Zealand)

Abstract

We present a modelling approach for sector asset pricing studies that incorporates sector-level risk factors, subgroup portfolios, and structural breakpoint tests that are better at isolating the time-varying nature and the firm-specific component of returns. Our results show considerable subsector heterogeneity, while the asset pricing model using local risk factors and inductive structural breaks results in a superior model ( R 2 of 80.42% relative to R 2 of 68.79% of “conventional” models). Finally, we show that some of the variances of residuals, normally assumed to be the firm-specific component of returns, can be attributed to the changing relationship between sector returns and risk factors.

Suggested Citation

  • Daniel J. Tulloch & Ivan Diaz-Rainey & I. M. Premachandra, 2020. "Modelling Sector-Level Asset Prices," JRFM, MDPI, vol. 13(6), pages 1-32, June.
    • Handle: RePEc:gam:jjrfmx:v:13:y:2020:i:6:p:120-:d:369520
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    2. Liao, Ling & Diaz-Rainey, Ivan & Kuruppuarachchi, Duminda & Gehricke, Sebastian, 2023. "The role of fundamentals and policy in New Zealand's carbon prices," Energy Economics, Elsevier, vol. 124(C).

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