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

35 Pages Posted: 5 Oct 2017 Last revised: 11 Sep 2020

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 bivariate component GARCH-MIDAS model to estimate the long- and short-run components of the variances and covariances. The advantage of our model to the existing DCC-based models is that it uses the same form for both the variances and covariances and that it estimates these moments simultaneously. We apply this model to obtain long- and short-run factor betas for industry test portfolios, where the risk factors are the market, SMB, and HML portfolios. We use these betas in cross-sectional analysis of the risk premia. Among other things, we find that the risk premium related to the short-run market beta is significantly positive, irrespective of the choice of test portfolio. Further, the risk premia for the short-run betas of all the risk factors are significant outside recessions.

Keywords: long-run betas; short-run betas; risk premia; business cycles; 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 Stock 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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