Time-Invariance Coefficients Tests with the Adaptive Multi-Factor Model

32 Pages Posted: 26 Apr 2021 Last revised: 3 Nov 2021

See all articles by Liao Zhu

Liao Zhu

Cornell University - Department of Statistics and Data Science

Robert A. Jarrow

Cornell University - Samuel Curtis Johnson Graduate School of Management

Martin T. Wells

Cornell University - Law School

Date Written: April 26, 2021

Abstract

The purpose of this paper is to test the time-invariance of the beta coefficients estimated by the Adaptive Multi-Factor (AMF) model. The AMF model is implied by the generalized arbitrage pricing theory (GAPT), which implies constant beta coefficients. The AMF model utilizes a Groupwise Interpretable Basis Selection (GIBS) algorithm to identify the relevant factors from among all traded ETFs. We compare the AMF model with the Fama-French 5-factor (FF5) model. We show that for nearly all time periods with length less than 6 years, the beta coefficients are time-invariant for the AMF model, but not for the FF5 model. This implies that the AMF model with a rolling window (such as 5 years) is more consistent with realized asset returns than is the FF5 model.

Keywords: Asset pricing, Adaptive Multi-Factor model, GIBS algorithm, high-dimensional statistics, machine learning.

JEL Classification: C10, G10

Suggested Citation

Zhu, Liao and Jarrow, Robert A. and Wells, Martin T., Time-Invariance Coefficients Tests with the Adaptive Multi-Factor Model (April 26, 2021). Cornell Legal Studies Research Paper No. 21-22, Available at SSRN: https://ssrn.com/abstract=3834053 or http://dx.doi.org/10.2139/ssrn.3834053

Liao Zhu (Contact Author)

Cornell University - Department of Statistics and Data Science ( email )

301 Tower Road
Ithaca, NY 14853-3801
United States
607-379-7330 (Phone)

Robert A. Jarrow

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Department of Finance
Ithaca, NY 14853
United States
607-255-4729 (Phone)
607-254-4590 (Fax)

Martin T. Wells

Cornell University - Law School ( email )

Comstock Hall
Ithaca, NY 14853
United States
607-255-8801 (Phone)

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