Estimating the Conditional CAPM with Overlapping Data Inference

96 Pages Posted: 19 Oct 2013

See all articles by Esben Hedegaard

Esben Hedegaard

Arizona State University (ASU) - W.P. Carey School of Business

Robert J. Hodrick

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: February 25, 2013

Abstract

Asset pricing models such as the conditional CAPM are typically estimated with MLE using a monthly or quarterly horizon with data sampled to match the horizon even though daily data are available. We develop an overlapping data inference methodology (ODIN) that uses all of the data while maintaining the monthly or quarterly forecasting period, and we apply it to the conditional CAPM. Our approach recognizes that the first order conditions of MLE can be used as orthogonality conditions of GMM. We simulate from GARCH and MIDAS models and examine the substantial reductions in standard errors and increases in power that arise from our methodology. Using historical data, we find considerable differences in the estimates from the non-overlapping samples that begin on different days. Using our overlapping data inference, we find a significant risk-return trade-off in the monthly data from 1955 to 2011 with a symmetric GARCH model.

Suggested Citation

Hedegaard, Esben and Hodrick, Robert J., Estimating the Conditional CAPM with Overlapping Data Inference (February 25, 2013). Netspar Discussion Paper No. 02/2013-031. Available at SSRN: https://ssrn.com/abstract=2342171 or http://dx.doi.org/10.2139/ssrn.2342171

Esben Hedegaard

Arizona State University (ASU) - W.P. Carey School of Business ( email )

Tempe, AZ 85287-3706
United States

Robert J. Hodrick (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

365 Fifth Avenue, 5th Floor
New York, NY 10016-4309
United States

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