Pricing Shocks to Conditional Market Beta
37 Pages Posted: 9 Dec 2016 Last revised: 16 Dec 2016
Date Written: December 1, 2016
We estimate monthly conditional market beta of 10 momentum and 25 size and book-to-market portfolios between 1946 and 2016 using a multivariate GARCH model. In the ICAPM conditional market beta are important determinants of expected returns and covariances of assets. Thus, shocks to conditional market beta imply shocks to the investment opportunity set. We define shocks to conditional market beta as state variables, and document that they carry economically large and statistically significant risk premia. Moreover, we show that shocks to conditional market beta are related to but clearly distinct from the Fama-French-Carhart size, book-to-market and momentum factors.
Keywords: Conditional CAPM, Intertemporal CAPM, Intertemporal Hedging Demand, Conditional Market Beta, Multivariate GARCH, Principal Component, Investment Opportunity Set, State Variable
JEL Classification: G12
Suggested Citation: Suggested Citation