Testing conditional factor models: A nonparametric approach

Yan Li and Liyan Yang

Journal of Empirical Finance, 2011, vol. 18, issue 5, 972-992

Abstract: Some recent studies of conditional factor models do not specify conditioning information but use data from small windows to estimate the time series of conditional alphas and betas. In this paper, we propose a nonparametric method using an optimal window to estimate time-varying coefficients. In addition, we offer two empirical tests of a conditional factor model. Using our new method, we examine the performance of the conditional CAPM and the conditional Fama–French three-factor model in explaining the return variations of portfolios sorted by size, book-to-market ratios, and past returns, for which recent literature has generated controversial results. We find that, although in general the conditional FF model outperforms the conditional CAPM, both models fail to explain well-known asset-pricing anomalies. Moreover, for both models, the failure is more pronounced for the equally-weighted portfolios than for the value-weighted ones.

Keywords: Conditional CAPM; Conditional Fama–French three-factor model; Momentum; Nonparametric method; Size; Value (search for similar items in EconPapers)
JEL-codes: G10 G11 G12 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:18:y:2011:i:5:p:972-992

DOI: 10.1016/j.jempfin.2011.07.004

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