Modelling Sector-Level Asset Prices

Daniel J. Tulloch, Ivan Diaz-Rainey and I. M. Premachandra
Additional contact information
Daniel J. Tulloch: Smith School of Enterprise and the Environment, University of Oxford, South Parks Road, Oxford OX1 3QY, UK
Ivan Diaz-Rainey: Department of Accountancy & Finance, University of Otago, P.O. Box 56, Dunedin 9054, New Zealand
I. M. Premachandra: Department of Accountancy & Finance, University of Otago, P.O. Box 56, Dunedin 9054, New Zealand

JRFM, 2020, vol. 13, issue 6, 1-32

Abstract: We present a modelling approach for sector asset pricing studies that incorporates sector-level risk factors, subgroup portfolios, and structural breakpoint tests that are better at isolating the time-varying nature and the firm-specific component of returns. Our results show considerable subsector heterogeneity, while the asset pricing model using local risk factors and inductive structural breaks results in a superior model ( R 2 of 80.42% relative to R 2 of 68.79% of “conventional” models). Finally, we show that some of the variances of residuals, normally assumed to be the firm-specific component of returns, can be attributed to the changing relationship between sector returns and risk factors.

Keywords: asset pricing; stock market; structural breaks; sector analysis (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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