Learning about Beta: Time-Varying Factor Loadings, Expected Returns,and the Conditional CAPM

Francesco FRANZONI and Tobias Adrian ()
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Francesco FRANZONI: University of Lugano and Swiss Finance Institute

No 08-36, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We complement the conditional CAPM by introducing unobservable long-run changes in risk factor loadings. In this environment, investors rationally `learn' the long-level of factor loadings from the observation of realized returns. As a direct consequence of this assumption, conditional betas are modeled using the Kalman ¯lter. Because of its focus on low frequency variation in betas, our approach circumvents recent criticisms of the conditional CAPM. When tested on portfolios sorted by size and book-to-market, our learning-augmented conditional CAPM fails to be rejected.

Keywords: Asset Pricing; Bayesian Learning; CAPM Anomalies; Value Premium (search for similar items in EconPapers)
JEL-codes: G12 C11 (search for similar items in EconPapers)
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Related works:
Working Paper: Learning about Beta: time-varying factor loadings, expected returns and the conditional CAPM (2005)
Working Paper: Learning about beta: time-varying factor loadings, expected returns, and the conditional CAPM (2008)
Journal Article: Learning about beta: Time-varying factor loadings, expected returns, and the conditional CAPM (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:chf:rpseri:rp0836

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