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Long- and Short-Run Components of Factor Betas: Implications for Stock Pricing

Author

Listed:
  • Asgharian, Hossein
  • Christiansen, Charlotte
  • Hou, Ai Jun
  • Wang, Weining

Abstract

We propose a bivariate component GARCH-MIDAS model to estimate the long- and short-run components of the variances and covariances. The advantage of our model to the existing DCC-based models is that it uses the same form for both the variances and covariances and that it estimates these moments simultaneously. We apply this model to obtain long- and short-run factor betas for industry test portfolios, where the risk factors are the market, SMB, and HML portfolios. We use these betas in cross-sectional analysis of the risk premia. Among other things, we find that the risk premium related to the short- run market beta is significantly positive, irrespective of the choice of test portfolio. Further, the risk premia for the short-run betas of all the risk factors are significant outside recessions.

Suggested Citation

  • Asgharian, Hossein & Christiansen, Charlotte & Hou, Ai Jun & Wang, Weining, 2020. "Long- and Short-Run Components of Factor Betas: Implications for Stock Pricing," IRTG 1792 Discussion Papers 2020-020, Humboldt University of Berlin, International Research Training Group 1792 "High Dimensional Nonstationary Time Series".
    • Handle: RePEc:zbw:irtgdp:2020020
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    References listed on IDEAS

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    More about this item

    Keywords

    long-run betas; short-run betas; risk premia; business cycles; component GARCH model; MIDAS;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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