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Testing Conditional Factor Models

63 Pages Posted: 19 Apr 2011  

Andrew Ang

BlackRock, Inc

Dennis Kristensen

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

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Date Written: January 21, 2011

Abstract

We develop a methodology for estimating time-varying alphas and factor loadings based on nonparametric techniques. We test whether conditional alphas and long-run alphas, which are averages of conditional alphas, 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 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.

Suggested Citation

Ang, Andrew and Kristensen, Dennis, Testing Conditional Factor Models (January 21, 2011). Netspar Discussion Paper No. 01/2011-030. Available at SSRN: https://ssrn.com/abstract=1814008 or http://dx.doi.org/10.2139/ssrn.1814008

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/

University of Aarhus - 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

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