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The competitions of time-varying and constant loadings in asset pricing models: empirical evidence and agent-based simulations

Author

Listed:
  • Hung-Wen Lin

    (Nanfang College Guangzhou)

  • Jing-Bo Huang

    (Sun Yat-Sen University)

  • Kun-Ben Lin

    (Beijing Institute of Technology)

  • Shu-Heng Chen

    (National Chengchi University)

Abstract

Under two frameworks of cross-section and time-series factors, we implement asset pricing models to dissect the abnormal returns in the Chinese stock market. Our findings indicate that the model using the earnings-to-price factor outperforms the model using the book-to-market factor in the framework of cross-section factors. Moreover, we further compare the time-varying loadings with constant loadings in the asset pricing models. Existing research has implied the outperformance of time-varying loadings in the US market. However, we consider the effects of backdoor listings in the Chinese stock market. Our evidence documents that the time-varying loading factor model cannot perfectly surpass the constant loading model. Our agent-based simulations indicate that such a finding originates from the static collective behaviors and stable beliefs of the Chinese traders.

Suggested Citation

  • Hung-Wen Lin & Jing-Bo Huang & Kun-Ben Lin & Shu-Heng Chen, 2022. "The competitions of time-varying and constant loadings in asset pricing models: empirical evidence and agent-based simulations," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 17(2), pages 577-612, April.
    • Handle: RePEc:spr:jeicoo:v:17:y:2022:i:2:d:10.1007_s11403-021-00337-2
    DOI: 10.1007/s11403-021-00337-2
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    More about this item

    Keywords

    Asset pricing models; Momentum trader; Time-varying loadings; Trader beliefs;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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