Testing Conditional Factor Models

47 Pages Posted: 4 Mar 2009

See all articles by Andrew Ang

Andrew Ang

BlackRock, Inc

Dennis Kristensen

University College London; Aarhus University - CREATES; Cemmap (Centre for Microdata Methods and Practice)

Multiple version iconThere are 3 versions of this paper

Date Written: March 4, 2009

Abstract

We develop a new methodology for estimating time-varying factor loadings and conditional alphas based on nonparametric techniques. We test whether long-run alphas, or averages of conditional alphas over the sample, are equal to zero and derive test statistics for the constancy of factor loadings. 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 when there is no time variation in the factor loadings. As applications of the methodology, we estimate conditional CAPM and Fama and French (1993) 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.

Keywords: Nonparametric estimator, time-varying beta, conditional alpha, book-to-market premium, momentum effect

JEL Classification: C14, C22, G12

Suggested Citation

Ang, Andrew and Kristensen, Dennis and Kristensen, Dennis, Testing Conditional Factor Models (March 4, 2009). AFA 2010 Atlanta Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1353358 or http://dx.doi.org/10.2139/ssrn.1353358

Andrew Ang (Contact Author)

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

Dennis Kristensen

University College London ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom
+44 (0)20 7679 5846 (Phone)

HOME PAGE: http://www.ucl.ac.uk/economics/

Aarhus University - CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Cemmap (Centre for Microdata Methods and Practice) ( email )

7 Ridgmount Street
London WC1E 7AE, WC1E 7 AE
United Kingdom

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
574
Abstract Views
2,836
Rank
33,472
PlumX Metrics