Pricing Shocks to Conditional Market Beta

37 Pages Posted: 9 Dec 2016 Last revised: 16 Dec 2016

Thomas Andreas Maurer

Washington University in St. Louis - John M. Olin Business School; London School of Economics & Political Science (LSE)

Bo Tang

Washington University in St. Louis - John M. Olin Business School

Date Written: December 1, 2016

Abstract

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

Maurer, Thomas Andreas and Tang, Bo, Pricing Shocks to Conditional Market Beta (December 1, 2016). Available at SSRN: https://ssrn.com/abstract=2879552 or http://dx.doi.org/10.2139/ssrn.2879552

Thomas Andreas Maurer (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Bo Tang

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

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