Estimation of Conditional Asset Pricing Models with Integrated Variables in the Beta Specification

27 Pages Posted: 12 Dec 2019

See all articles by Antonios Antypas

Antonios Antypas

University of Piraeus - Department of Banking and Financial Management

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance; London South Bank University; CESifo (Center for Economic Studies and Ifo Institute); German Institute for Economic Research (DIW Berlin)

Nikolaos Kourogenis

University of Piraeus, Department of Banking and Financial Management

Nikitas Pittis

University of Piraeus - Department of Banking and Financial Management

Date Written: 2019

Abstract

We introduce a methodology which deals with possibly integrated variables in the specification of the betas of conditional asset pricing models. In such a case, any model which is directly derived by a polynomial approximation of the functional form of the conditional beta will inherit a nonstationary right hand side. Our approach uses the cointegrating relationships between the integrated variables in order to maintain the stationarity of the right hand side of the estimated model, thus, avoiding the issues that arise in the case of an unbalanced regression. We present an example where our methodology is applied to the returns of funds-of-funds which are based on the Morningstar mutual fund ranking system. The results provide evidence that the residuals of possible cointegrating relationships between integrated variables in the specification of the conditional betas may reveal significant information concerning the dynamics of the betas.

Keywords: conditional CAPM, time-varying beta, cointegration, Morningstar star-rating system

JEL Classification: G100, G230, C100

Suggested Citation

Antypas, Antonios and Caporale, Guglielmo Maria and Kourogenis, Nikolaos and Pittis, Nikitas, Estimation of Conditional Asset Pricing Models with Integrated Variables in the Beta Specification (2019). CESifo Working Paper No. 7969. Available at SSRN: https://ssrn.com/abstract=3502016

Antonios Antypas (Contact Author)

University of Piraeus - Department of Banking and Financial Management ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance ( email )

Kingston Lane
Marie Jahoda Building
Uxbridge, Middlesex UB8 3PH
United Kingdom
+44 1895 266713 (Phone)
+44 1895 269770 (Fax)

HOME PAGE: http://www.brunel.ac.uk/about/acad/bbs/bbsstaff/ef_staff/guglielmocaporale/

London South Bank University ( email )

Centre for Monetary and Financial Economics
London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

Nikolaos Kourogenis

University of Piraeus, Department of Banking and Financial Management ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece

Nikitas Pittis

University of Piraeus - Department of Banking and Financial Management ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece

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