Long- and Short-Run Components of Factor Betas: Implications for Equity Pricing
39 Pages Posted: 5 Oct 2017 Last revised: 3 Mar 2020
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. Decomposing risk across horizons 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 choice of test portfolios. The cross-sectional dispersion in short-run betas increases in contractionary economic conditions.
Keywords: long-run betas; short-run betas; risk premia; component GARCH model; MIDAS
JEL Classification: G12; C58; C51
Suggested Citation: Suggested Citation