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

Hossein Asgharian, Charlotte Christiansen, Ai Jun Hou and Weining Wang

No 2020-020, IRTG 1792 Discussion Papers from Humboldt University of Berlin, International Research Training Group 1792 "High Dimensional Nonstationary Time Series"

Abstract: We propose a bivariate component GARCH-MIDAS model to estimate the long- and short-run components of the variances and covariances. The advantage of our model to the existing DCC-based models is that it uses the same form for both the variances and covariances and that it estimates these moments simultaneously. We apply this model to obtain long- and short-run factor betas for industry test portfolios, where the risk factors are the market, SMB, and HML portfolios. We use these betas in cross-sectional analysis of the risk premia. Among other things, we find that the risk premium related to the short- run market beta is significantly positive, irrespective of the choice of test portfolio. Further, the risk premia for the short-run betas of all the risk factors are significant outside recessions.

Keywords: long-run betas; short-run betas; risk premia; business cycles; component GARCH model; MIDAS (search for similar items in EconPapers)
JEL-codes: C51 C58 G12 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-cwa and nep-rmg
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Journal Article: Long- and short-run components of factor betas: Implications for stock pricing (2021) Downloads
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