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

39 Pages Posted: 5 Oct 2017 Last revised: 3 Mar 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 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

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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