The competitions of time-varying and constant loadings in asset pricing models: empirical evidence and agent-based simulations

Hung-Wen Lin, Jing-Bo Huang, Kun-Ben Lin and Shu-Heng Chen
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Hung-Wen Lin: Nanfang College Guangzhou
Jing-Bo Huang: Sun Yat-Sen University
Kun-Ben Lin: Beijing Institute of Technology

Journal of Economic Interaction and Coordination, 2022, vol. 17, issue 2, No 7, 577-612

Abstract: Abstract Under two frameworks of cross-section and time-series factors, we implement asset pricing models to dissect the abnormal returns in the Chinese stock market. Our findings indicate that the model using the earnings-to-price factor outperforms the model using the book-to-market factor in the framework of cross-section factors. Moreover, we further compare the time-varying loadings with constant loadings in the asset pricing models. Existing research has implied the outperformance of time-varying loadings in the US market. However, we consider the effects of backdoor listings in the Chinese stock market. Our evidence documents that the time-varying loading factor model cannot perfectly surpass the constant loading model. Our agent-based simulations indicate that such a finding originates from the static collective behaviors and stable beliefs of the Chinese traders.

Keywords: Asset pricing models; Momentum trader; Time-varying loadings; Trader beliefs (search for similar items in EconPapers)
JEL-codes: G10 G11 G12 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s11403-021-00337-2

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