Regression Based Estimation of Dynamic Asset Pricing Models

56 Pages Posted: 2 Mar 2015

See all articles by Tobias Adrian

Tobias Adrian

International Monetary Fund

Richard K. Crump

Federal Reserve Banks - Federal Reserve Bank of New York

Emanuel Moench

Deutsche Bundesbank; Goethe University Frankfurt - Department of Money and Macroeconomics

Multiple version iconThere are 2 versions of this paper

Date Written: March 2015

Abstract

We propose regression based estimators for beta representations of dynamic asset pricing models with an affine pricing kernel specification. We allow for state variables that are cross sectional pricing factors, forecasting variables for the price of risk, and factors that are both. The estimators explicitly allow for time varying prices of risk, time varying betas and serially dependent pricing factors. Our approach nests the Fama-MacBeth two-pass estimator as a special case. We provide asymptotic multistage standard errors necessary to conduct inference for asset pricing tests. We illustrate our new estimators in an application to the joint pricing of stocks and bonds. The application features strongly time varying, highly significant prices of risk which are found to be quantitatively more important than time varying betas in reducing pricing errors.

Keywords: Dynamic Asset Pricing, Fama-MacBeth Regressions, GMM, Minimum Distance Estimation, Reduced Rank Regression, Time-varying Betas

JEL Classification: C58, G10, G12

Suggested Citation

Adrian, Tobias and Crump, Richard K. and Moench, Emanuel, Regression Based Estimation of Dynamic Asset Pricing Models (March 2015). CEPR Discussion Paper No. DP10449, Available at SSRN: https://ssrn.com/abstract=2572427

Tobias Adrian (Contact Author)

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

HOME PAGE: http://www.tobiasadrian.com

Richard K. Crump

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Emanuel Moench

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany
+49 69 95662312 (Phone)

HOME PAGE: http://https://www.bundesbank.de/en/emanuel-moench

Goethe University Frankfurt - Department of Money and Macroeconomics ( email )

Germany

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