A semiparametric conditional capital asset pricing model

Zongwu Cai, Yu Ren () and Bingduo Yang

Journal of Banking & Finance, 2015, vol. 61, issue C, 117-126

Abstract: This paper proposes using a functional coefficient regression technique to estimate time-varying betas and alpha in the conditional capital asset pricing model (CAPM). Functional coefficient representation relaxes the strict assumptions regarding the structure of betas and alpha by combining the predictors into an index. Appropriate index variables are selected by applying the smoothly clipped absolute deviation penalty. In such a way, estimation and variable selection can be done simultaneously. Based on the empirical studies, the proposed model performs better than the alternatives in explaining asset returns and we find no strong evidence to reject the conditional CAPM.

Keywords: Conditional capital asset pricing model; Functional coefficient regression; Smoothly clipped absolute deviation penalty; Variable selection (search for similar items in EconPapers)
JEL-codes: C13 C52 G12 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:61:y:2015:i:c:p:117-126

DOI: 10.1016/j.jbankfin.2015.09.002

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