Asset Pricing Models with Conditional Betas and Alphas: The Effects of Data Snooping and Spurious Regression
38 Pages Posted: 20 Nov 2006 Last revised: 4 Aug 2010
Date Written: October 2006
This paper studies the estimation of asset pricing model regressions with conditional alphas and betas, focusing on the joint effects of data snooping and spurious regression. We find that the regressions are reasonably well specified for conditional betas, even in settings where simple predictive regressions are severely biased. However, there are biases in estimates of the conditional alphas. When time-varying alphas are suppressed and only time-varying betas are considered, the betas become baised. Previous studies overstate the significance of time-varying alphas.
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