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Interest-rate risk factor and stock returns: a time-varying factor-loadings model

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  • Peng Huang
  • C. James Hueng

Abstract

We extend the Fama-French three-factor model to include a risk factor that proxies for interest-rate risk faced by firms in an attempt to reduce the pricing errors that the three-factor model cannot explain. These pricing errors are observed especially in small size and low book-to-market ratio firms, which are in general more sensitive to interest-rate risk. In addition, the factor loadings are modelled as time-varying so that the investors' learning process can be taken into account. The results show that our Time-Varying-Loadings Four-Factor (TVL4) model significantly reduces the pricing errors.

Suggested Citation

  • Peng Huang & C. James Hueng, 2009. "Interest-rate risk factor and stock returns: a time-varying factor-loadings model," Applied Financial Economics, Taylor & Francis Journals, vol. 19(22), pages 1813-1824.
    • Handle: RePEc:taf:apfiec:v:19:y:2009:i:22:p:1813-1824
    DOI: 10.1080/09603100903049674
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    Cited by:

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    2. Mamadou Cisse & Mamadou Konte & Mohamed Toure & Smael Afolabi Assani, 2019. "Contribution to the Valuation of BRVM’s Assets: A Conditional CAPM Approach," JRFM, MDPI, vol. 12(1), pages 1-15, February.
    3. Jacques Peeperkorn & Yudhvir Seetharam, 2016. "A learning-augmented approach to pricing risk in South Africa," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 6(1), pages 117-139, April.
    4. Laura Ferrando & Román Ferrer & Francisco Jareño, 2017. "Interest Rate Sensitivity of Spanish Industries: A Quantile Regression Approach," Manchester School, University of Manchester, vol. 85(2), pages 212-242, March.

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