Empirical Asset Pricing with Score-Driven Conditional Betas†

Thomas Giroux, Julien Royer and Olivier Zerbib

Journal of Financial Econometrics, 2024, vol. 22, issue 5, 1310-1344

Abstract: We develop a novel empirical asset pricing framework to estimate time-varying risk premia, building upon score-driven conditional betas models. First, we extend the theory by establishing the asymptotic distribution of standard test statistics, allowing us to assess the significance of a given factor in the regression. Additionally, we introduce a bootstrap procedure and establish its validity. Second, we propose a two-step estimation procedure to recover time-varying risk premia. We illustrate the performance of our tests and risk premia estimation through simulations. Third, we estimate a time-varying premium associated with a carbon risk factor in the cross-section of U.S. industry portfolios.

Keywords: asset pricing models; carbon risk; dynamic factor models; score-driven models (search for similar items in EconPapers)
JEL-codes: C12 C32 G12 (search for similar items in EconPapers)
Date: 2024
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