Long- and Short-Run Components of Factor Betas: Implications for Equity Pricing

39 Pages Posted: 5 Oct 2017

See all articles by Hossein Asgharian

Hossein Asgharian

Lund University - Department of Economics; Knut Wicksell Centre for Financial Studies

Charlotte Christiansen

Aarhus University - CREATES

Ai Jun Hou

Stockholm University

Weining Wang

Humboldt University of Berlin

Date Written: November 12, 2018

Abstract

We propose a new bivariate component GARCH model that simultaneously obtains factor betas’ long- and short-run components. We apply the model to industry portfolios using market, small-minus-big, and high-minus-low portfolios as risk factors. We find that the cross-sectional average and dispersion of the betas’ short-run component increase in bad states of the economy. Decomposing risk across horizons might help explain the anomaly that the market beta is typically not priced, as the risk premium related to the short-run market beta is significantly positive. This finding is robust to portfolio choice.

Keywords: long-run betas; short-run betas; risk premia; component GARCH model; MIDAS

JEL Classification: G12; C58; C51

Suggested Citation

Asgharian, Hossein and Christiansen, Charlotte and Hou, Ai Jun and Wang, Weining, Long- and Short-Run Components of Factor Betas: Implications for Equity Pricing (November 12, 2018). Available at SSRN: https://ssrn.com/abstract=3046548 or http://dx.doi.org/10.2139/ssrn.3046548

Hossein Asgharian

Lund University - Department of Economics; Knut Wicksell Centre for Financial Studies ( email )

P.O. Box 7082
S-220 07 Lund
Sweden
046-222-86-87 (Phone)

Charlotte Christiansen (Contact Author)

Aarhus University - CREATES ( email )

Fuglesangs Alle 4
Aarhus V, DK 8210
Denmark

Ai Jun Hou

Stockholm University ( email )

Universitetsvägen 10
Stockholm, Stockholm SE-106 91
Sweden

Weining Wang

Humboldt University of Berlin ( email )

Unter den Linden 6
Berlin, AK Berlin 10099
Germany

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