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A Dynamic Test of Conditional Asset Pricing Models

42 Pages Posted: 1 Mar 2014 Last revised: 23 Nov 2016

Daniele Bianchi

University of Warwick, Warwick Business School

Date Written: March 22, 2015

Abstract

I use Bayesian tools to develop a dynamic testing methodology for conditional factor pricing models, in which time-varying betas, idiosyncratic risks, and factors risk premia are jointly estimated in a single step. Based on this framework, I test over fifty years of post-war monthly data some of the most common factor pricing models on size, book-to-market, and momentum deciles portfolios, both in the time series and in the cross section. The empirical results show that, a conditional specification of the recent five-factor model of Fama and French (2015) outperforms a set of theory-based competing linear pricing models along several dimensions.

Keywords: Factor Pricing Models, Savage-Dickey Density Ratio, Stochastic Betas, Bayesian Econometrics

JEL Classification: G12, E44, C11

Suggested Citation

Bianchi, Daniele, A Dynamic Test of Conditional Asset Pricing Models (March 22, 2015). Available at SSRN: https://ssrn.com/abstract=2402309 or http://dx.doi.org/10.2139/ssrn.2402309

Daniele Bianchi (Contact Author)

University of Warwick, Warwick Business School ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

HOME PAGE: http://whitesphd.com/

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