Long- and Short-Run Components of Factor Betas: Implications for Stock Pricing
35 Pages Posted: 5 Oct 2017 Last revised: 11 Sep 2020
Date Written: November 12, 2018
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: Suggested Citation