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Estimating the Risk-Return Trade-off with Overlapping Data Inference

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  • Esben Hedegaard
  • Robert J. Hodrick

Abstract

Asset pricing models such as the conditional CAPM are typically estimated with MLE using a monthly or quarterly horizon with data sampled to match the horizon even though daily data are available. We develop an overlapping data inference methodology (ODIN) that uses all of the data while maintaining the monthly or quarterly forecasting period, and we apply it to the conditional CAPM. Our approach recognizes that the first order conditions of MLE can be used as orthogonality conditions of GMM. Using historical data, we find considerable differences in the estimates from the non-overlapping samples that begin on different days.

Suggested Citation

  • Esben Hedegaard & Robert J. Hodrick, 2014. "Estimating the Risk-Return Trade-off with Overlapping Data Inference," NBER Working Papers 19969, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:19969
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    4. Raymond C. W. Leung & Yu-Man Tam, 2021. "Statistical Arbitrage Risk Premium by Machine Learning," Papers 2103.09987, arXiv.org.
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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