Long- and Short-Run Components of Factor Betas: Implications for Equity Pricing
Research output: Other contribution › Miscellaneous
We propose a novel bivariate component GARCH model that simultaneously obtains factor betas’ long- and short-run components. We apply the model to industry portfolios using market, small-minus-big, and high-minus-low portfolios as risk factors. We find that the cross-sectional average and dispersion of the betas’ short-run component increase in bad states of the economy. Our analysis shows that decomposing risk across horizons might help explain the anomaly that the market beta is typically not priced, as we find that the risk premium related to the short-run market beta is significantly positive. This is robust to portfolio choice.
|Research areas and keywords||
Subject classification (UKÄ) – MANDATORY
|Publication status||Submitted - 2018|