The Conditional Relation between Fama-French Betas and Return

Schmalenbach Business Review, Vol. 65, October 2013, pp. 334-358

25 Pages Posted: 15 Oct 2013 Last revised: 16 Oct 2013

See all articles by Stefan Koch

Stefan Koch

University of Bonn

Christian Westheide

University of Vienna - Department of Finance

Date Written: 2013

Abstract

We apply the conditional approach of Pettengill, Sundaram, and Mathur (1995) 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. Further, we extend the test developed by Freeman and Guermat (2006) to multi-factor models and test if risk premia are priced within the conditional approach. Our test leads to qualitatively identical results as the Fama-MacBeth (1973) test, thus confirming its validity. Additionally, our use of portfolios sorted by various characteristics accentuates how critical the choice of test portfolios is to empirical asset pricing.

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

JEL Classification: G12

Suggested Citation

Koch, Stefan and Westheide, Christian, The Conditional Relation between Fama-French Betas and Return (2013). Schmalenbach Business Review, Vol. 65, October 2013, pp. 334-358, Available at SSRN: https://ssrn.com/abstract=2339936

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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