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Rolling Regression Analysis of the Pástor-Stambaugh Model: Evidence from Robust Instrumental Variables

Author

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  • François-Éric Racicot

    (University of Ottawa, ON, Canada; Chaire d’information financière et organisationnelle, ESG-UQAM (Montreal, Qc); CGA-Canada Accounting and Governance Centre)

  • William F. Rentz

    (University of Ottawa)

  • Alfred L. Kahl

    (University of Ottawa)

Abstract

The capital asset pricing model (CAPM), Fama-French (FF), and Pástor-Stambaugh (PS) factor models are examined using a new dynamic rolling regression version of the generalized method of moments (GMM) method. This rolling regression framework not only allows us to investigate phases of the business cycle, but also permits regression estimates to vary through time due to changes in the development and efficiency of the sectors. The principal reasons for using the dynamic GMM with robust instruments is that some of these factors are measured with errors and the disturbances may be non-spherical. The CAPM appears as the most parsimonious model to explain the FF sector returns. Furthermore, the rolling GMM approach is clearly more sensitive to dynamic financial episodes than the ordinary least squares approach. In particular, liquidity has some anticipatory power, as it is able to forecast the 2007–2009 crises with heightened volatility starting in late 2005.

Suggested Citation

  • François-Éric Racicot & William F. Rentz & Alfred L. Kahl, 2017. "Rolling Regression Analysis of the Pástor-Stambaugh Model: Evidence from Robust Instrumental Variables," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 23(1), pages 75-90, February.
    • Handle: RePEc:kap:iaecre:v:23:y:2017:i:1:d:10.1007_s11294-016-9620-x
    DOI: 10.1007/s11294-016-9620-x
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    More about this item

    Keywords

    Business cycles; CAPM; Fama-French model; Liquidity; Rolling GMM; Robust instruments;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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