Long- and Short-Run Components of Factor Betas: Implications for Equity Pricing

Hossein Asgharian, Charlotte Christiansen, 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

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

Abstract: 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: C58 G12 (search for similar items in EconPapers)
Pages: 43
Date: 2017-10-06
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