Rolling Regression Analysis of the Pástor-Stambaugh Model: Evidence from Robust Instrumental Variables

François-Éric Racicot (), William F. Rentz () and Alfred L. Kahl ()
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William F. Rentz: University of Ottawa
Alfred L. Kahl: University of Ottawa

International Advances in Economic Research, 2017, vol. 23, issue 1, No 7, 75-90

Abstract: Abstract The capital asset pricing model (CAPM), Fama-French (FF), and Pástor-Stambaugh (PS) factor models are examined using a new dynamic rolling regression version of the generalized method of moments (GMM) method. This rolling regression framework not only allows us to investigate phases of the business cycle, but also permits regression estimates to vary through time due to changes in the development and efficiency of the sectors. The principal reasons for using the dynamic GMM with robust instruments is that some of these factors are measured with errors and the disturbances may be non-spherical. The CAPM appears as the most parsimonious model to explain the FF sector returns. Furthermore, the rolling GMM approach is clearly more sensitive to dynamic financial episodes than the ordinary least squares approach. In particular, liquidity has some anticipatory power, as it is able to forecast the 2007–2009 crises with heightened volatility starting in late 2005.

Keywords: Business cycles; CAPM; Fama-French model; Liquidity; Rolling GMM; Robust instruments (search for similar items in EconPapers)
JEL-codes: C10 G12 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11294-016-9620-x

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