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

Research output: Other contributionMiscellaneous

Abstract

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.

Details

Authors
Organisations
External organisations
  • Aarhus University
  • Stockholm University
  • Humboldt University of Berlin
Research areas and keywords

Subject classification (UKÄ) – MANDATORY

  • Economics
Original languageEnglish
Publication statusSubmitted - 2018
Publication categoryResearch