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

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  • Liao Zhu
  • Robert A. Jarrow
  • Martin T. Wells

Abstract

The purpose of this paper is to test the time-invariance of the beta coefficients estimated by the Adaptive Multi-Factor (AMF) model. The AMF model is implied by the generalized arbitrage pricing theory (GAPT), which implies constant beta coefficients. The AMF model utilizes a Groupwise Interpretable Basis Selection (GIBS) algorithm to identify the relevant factors from among all traded ETFs. We compare the AMF model with the Fama-French 5-factor (FF5) model. We show that for nearly all time periods with length less than 6 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 5 years) is more consistent with realized asset returns than is the FF5 model.

Suggested Citation

  • Liao Zhu & Robert A. Jarrow & Martin T. Wells, 2020. "Time-Invariance Coefficients Tests with the Adaptive Multi-Factor Model," Papers 2011.04171, arXiv.org, revised Apr 2021.
    • Handle: RePEc:arx:papers:2011.04171
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    Cited by:

    1. 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.
    2. Liao Zhu & Haoxuan Wu & Martin T. Wells, 2021. "A News-based Machine Learning Model for Adaptive Asset Pricing," Papers 2106.07103, arXiv.org.
    3. Liao Zhu, 2021. "The Adaptive Multi-Factor Model and the Financial Market," Papers 2107.14410, arXiv.org, revised Aug 2021.
    4. 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.

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