Conditional Asset Pricing with a Large Information Set

38 Pages Posted: 1 Mar 2007

See all articles by Emanuel Moench

Emanuel Moench

Deutsche Bundesbank; Goethe University Frankfurt - Department of Money and Macroeconomics

Abstract

Dynamic factors summarize the information in a large number of variables and are therefore intuitively appealing proxies for the information set available to investors. This paper demonstrates that conditioning on dynamic factors instead of commonly used instruments substantially reduces the pricing errors implied by conditional models. Dynamic factors are further shown to exhibit incremental explanatory power over benchmark conditioning variables. The results withstand a number of robustness tests and carry important implications for the specification of conditional asset pricing models in applied research and practice.

Keywords: asset pricing, conditional CAPM, dynamic factor models, GMM

JEL Classification: G12, C13, C31

Suggested Citation

Moench, Emanuel, Conditional Asset Pricing with a Large Information Set. Available at SSRN: https://ssrn.com/abstract=966650 or http://dx.doi.org/10.2139/ssrn.966650

Emanuel Moench (Contact Author)

Deutsche Bundesbank ( email )

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Frankfurt/Main, 60431
Germany
+49 69 95662312 (Phone)

HOME PAGE: http://https://www.bundesbank.de/en/emanuel-moench

Goethe University Frankfurt - Department of Money and Macroeconomics ( email )

Germany

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