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Time-Invariance Coefficients Tests with the Adaptive Multi-Factor Model

Author

Listed:
  • Liao Zhu

    (Department of Statistics and Data Science, Cornell University, Ithaca, New York 14853, USA)

  • Robert A. Jarrow

    (Ronald P. and Susan E. Lynch Professor of Investment Management, Samuel Curtis Johnson Graduate School of Management, Cornell University, Ithaca, New York 14853, USA3Kamakura Corporation, Honolulu, Hawaii p96815, USA)

  • Martin T. Wells

    (Charles A. Alexander Professor of Statistical Sciences, Department of Statistics and Data Science, Cornell University, Ithaca, New York 14853, USA)

Abstract

This paper tests a multi-factor asset pricing model that does not assume that the return’s beta coefficients are constants. This is done by estimating the generalized arbitrage pricing theory (GAPT) using price differences. An implication of the GAPT is that when using price differences instead of returns, the beta coefficients are constant. We employ the adaptive multi-factor (AMF) model to test the GAPT utilizing a Groupwise Interpretable Basis Selection (GIBS) algorithm to identify the relevant factors from among all traded exchange-traded funds. We compare the performance of the AMF model with the Fama–French 5-factor (FF5) model. For nearly all time periods less than six years, the beta coefficients are time-invariant for the AMF model, but not for the FF5 model. This implies that the AMF model with a rolling window (such as five years) is more consistent with realized asset returns than is the FF5 model.

Suggested Citation

  • Liao Zhu & Robert A. Jarrow & Martin T. Wells, 2021. "Time-Invariance Coefficients Tests with the Adaptive Multi-Factor Model," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 11(04), pages 1-30, December.
    • Handle: RePEc:wsi:qjfxxx:v:11:y:2021:i:04:n:s2010139221500191
    DOI: 10.1142/S2010139221500191
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    Cited by:

    1. Liao Zhu & Haoxuan Wu & Martin T. Wells, 2021. "A News-based Machine Learning Model for Adaptive Asset Pricing," Papers 2106.07103, arXiv.org.
    2. Liao Zhu & Ningning Sun & Martin T. Wells, 2022. "Clustering Structure of Microstructure Measures," Applied Economics and Finance, Redfame publishing, vol. 9(1), pages 85-95, December.
    3. Aysenur Tarakcioglu Altinay & Mesut Dogan & Bilge Leyli Demirel Ergun & Sevdie Alshiqi, 2023. "The Fama-French Five-Factor Asset Pricing Model: A Research on Borsa Istanbul," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 4, pages 3-21.
    4. Liao Zhu, 2021. "The Adaptive Multi-Factor Model and the Financial Market," Papers 2107.14410, arXiv.org, revised Aug 2021.

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