Long- and Short-Run Components of Factor Betas: Implications for Equity Pricing
39 Pages Posted: 5 Oct 2017
Date Written: November 12, 2018
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: Suggested Citation