On Stable Factor Structures in the Pricing of Risk

Eric Ghysels ()

CIRANO Working Papers from CIRANO

Abstract: Much of the research describing the cross-sectional and time series behavior of asset returns can be characterized as a search for the relevant state variables and also a search for the relevant model specification. Ultimately the scope of such efforts is to find a satisfactory and stable asset pricing structure. In this paper we discuss various methods to accomplish this and appraise the success of two recently proposed classes of asset pricing models in tracking predictable patterns in risk and return trade-offs. The two classes are the conditional CAPM and the nonlinear APT. The parameters of both models are estimated via a set of moment conditions using the GMM estimator and the model fit is judged on the basis of the overidentifying restrictions. The fundamental problem is that overidentifying restrictions tests are not designed to diagnose whether a model, provides a stable relationship between the return series and risk factors. We use a set of recently developed tests for structural stability of parameter estimates for the GMM estimator to diagnose which factor structures appear stable through time in the context of the two aforementioned classes of models. In the course of trying to sort out whether there is systematic mispricing we shall also try to determine what type of model looks most promising for further development. In that regard we find the nonlinear APT more satisfactory than the conditional APT and CAPM. Dans cette étude nous réexaminons les modèles à facteurs qui ont été proposés récemment, c'est à dire le CAPM conditionnel et l'APT non-linéaire. Ces modèles ont été estimés par la méthode des moments généralisée. La diagnostique usuelle pour juger ces modèles est la statistique de suridentification. Le problème fondamental de cette statistique est qu'elle n'a pas de puissance par rapport à des alternatives caractérisés par des variations de paramètres. Évidement, ces variations entraînent des erreurs sur l'évaluation du risque. Nous proposons d'appliquer des tests de changement structurel pour les paramètres et analysons plusieurs modèles du type APT non-linéaire et CAPM conditionnel. Peu de modèles semblent être stable. Nous trouvons que la spécification du APT non-linéaire semble être quand même la plus satisfaisante.

Keywords: Structural change; Factor models; APT, Changement structurel; Modèles à facteurs, APT (search for similar items in EconPapers)
JEL-codes: C12 C13 C22 G12 (search for similar items in EconPapers)
Date: 1995-03-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Related works:
Working Paper: On Stable Factor Structurs in the Pricing of Risk (1995)
Working Paper: On Stable Factor Structurs in the Pricing of Risk (1995)
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Persistent link: https://EconPapers.repec.org/RePEc:cir:cirwor:95s-16

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