Long- and Short-Run Components of Factor Betas: Implications for Equity Pricing
Ai Jun Hou () and
Weining Wang ()
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Ai Jun Hou: Stockholm Business School, Postal: Stockholm Business School, Stockholm University, SE-106 91 Stockholm, Sweden
Weining Wang: City University of London, Postal: Department of Economics, City University of London, EC1V 0HB London, UK
CREATES Research Papers from Department of Economics and Business Economics, Aarhus University
We suggest a bivariate component GARCH model that simultaneously obtains factor betas’ long- and short-run components. We apply this new model to industry portfolios using market, small-minus-big, and high-minus-low portfolios as risk factors and find that the cross-sectional average and dispersion of the betas’ short-run component increase in bad states of the economy. Our analysis of the risk premium highlights the importance of decomposing risk across horizons: The risk premium associated with the short-run market beta is significantly positive. This is robust to the portfolio-set choice.
Keywords: long-run betas; short-run betas; risk premia; component GARCH model; MIDAS (search for similar items in EconPapers)
JEL-codes: G12 C58 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2017-34
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