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Empirical Asset Pricing with Score-Driven Conditional Betas†

Author

Listed:
  • Thomas Giroux
  • Julien Royer
  • Olivier David Zerbib

Abstract

We develop a novel empirical asset pricing framework to estimate time-varying risk premia, building upon score-driven conditional betas models. First, we extend the theory by establishing the asymptotic distribution of standard test statistics, allowing us to assess the significance of a given factor in the regression. Additionally, we introduce a bootstrap procedure and establish its validity. Second, we propose a two-step estimation procedure to recover time-varying risk premia. We illustrate the performance of our tests and risk premia estimation through simulations. Third, we estimate a time-varying premium associated with a carbon risk factor in the cross-section of U.S. industry portfolios.

Suggested Citation

  • Thomas Giroux & Julien Royer & Olivier David Zerbib, 2024. "Empirical Asset Pricing with Score-Driven Conditional Betas†," Journal of Financial Econometrics, Oxford University Press, vol. 22(5), pages 1310-1344.
    • Handle: RePEc:oup:jfinec:v:22:y:2024:i:5:p:1310-1344.
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbae007
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    More about this item

    Keywords

    asset pricing models; carbon risk; dynamic factor models; score-driven models;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General

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