Testing Conditional Factor Models
Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)
University College London; University of Aarhus - CREATES; Cemmap (Centre for Microdata Methods and Practice)
NBER Working Paper No. w17561
Using nonparametric techniques, we develop a methodology for estimating conditional alphas and betas and long-run alphas and betas, which are the averages of conditional alphas and betas, respectively, across time. The tests can be performed for a single asset or jointly across portfolios. The traditional Gibbons, Ross, and Shanken (1989) test arises as a special case of no time variation in the alphas and factor loadings and homoskedasticity. As applications of the methodology, we estimate conditional CAPM and multifactor models on book-to-market and momentum decile portfolios. We reject the null that long-run alphas are equal to zero even though there is substantial variation in the conditional factor loadings of these portfolios.
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Number of Pages in PDF File: 59working papers series
Date posted: November 4, 2011
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