The Conditional Relation between Fama-French Betas and Return

Schmalenbach Business Review, Forthcoming

30 Pages Posted: 14 Oct 2008 Last revised: 30 Sep 2013

See all articles by Stefan Koch

Stefan Koch

University of Bonn

Christian Westheide

University of Vienna - Department of Finance

Date Written: November 11, 2012

Abstract

According to asset pricing theory, in expectation there is a positive reward for taking risks. However, using realized returns, this relation is frequently reversed. In order to take this into account, we apply a conditional approach to the predominant model in asset pricing, the Fama-French three-factor model. We find that all three risk factors cross-sectionally drive asset returns. While other papers stop their analysis at this point, we extend the test developed by Freeman and Guermat (2006) to multifactor models and test if risk premia are priced within the conditional approach. Our test leads to qualitatively identical results as the widely used Fama-MacBeth test and hence confirms its validity.

Keywords: Empirical Asset Pricing, Beta Risk, Fama-French, Asymmetric Risk, Bootstrap

JEL Classification: G12

Suggested Citation

Koch, Stefan and Westheide, Christian, The Conditional Relation between Fama-French Betas and Return (November 11, 2012). Schmalenbach Business Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1283170 or http://dx.doi.org/10.2139/ssrn.1283170

Stefan Koch

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

Christian Westheide (Contact Author)

University of Vienna - Department of Finance ( email )

Bruennerstrasse 72
Vienna, 1210
Austria

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