Estimating the Risk-Return Trade-Off with Overlapping Data Inference

41 Pages Posted: 19 Mar 2014

See all articles by Esben Hedegaard

Esben Hedegaard

Arizona State University (ASU)

Robert J. Hodrick

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

Date Written: March 2014

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. Using historical data, we find considerable differences in the estimates from the non-overlapping samples that begin on different days.

Suggested Citation

Hedegaard, Esben and Hodrick, Robert J., Estimating the Risk-Return Trade-Off with Overlapping Data Inference (March 2014). NBER Working Paper No. w19969. Available at SSRN: https://ssrn.com/abstract=2411274

Esben Hedegaard (Contact Author)

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

Robert J. Hodrick

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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