Testing Conditional Factor Models

Dennis Kristensen and Andrew Ang

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: We develop a new methodology for estimating time-varying factor loadings and conditional alphas based on nonparametric techniques. We test whether long-run alphas, or averages of conditional alphas over the sample, are equal to zero and derive test statistics for the constancy of factor loadings. The tests can be performed for a single asset or jointly across portfolios. The traditional Gibbons, Ross and Shanken (1989) test arises as a special case when there is no time variation in the factor loadings. As applications of the methodology, we estimate conditional CAPM and Fama and French (1993) models on book-to-market and momentum decile portfolios. We reject the null that long-run alphas are equal to zero even though there is substantial variation in the conditional factor loadings of these portfolios.

Keywords: factor models; time-varying loadings; nonparametric estimation; kernel methods; testing (search for similar items in EconPapers)
JEL-codes: C12 C13 C14 C32 G11 (search for similar items in EconPapers)
Pages: 47
Date: 2009-03-04
New Economics Papers: this item is included in nep-ecm and nep-ets
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Citations: View citations in EconPapers (14)

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Related works:
Journal Article: Testing conditional factor models (2012)
Working Paper: Testing Conditional Factor Models (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2009-09

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