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

TY - JOUR

T1 - Long- and Short-Run Components of Factor Betas: Implications for Stock Pricing

AU - Asgharian, Hossein

AU - Christiansen, Charlotte

AU - Hou, Ai Jun

AU - Wang, Weining

N1 - Publisher Copyright: © 2021 The Authors

PY - 2021/9

Y1 - 2021/9

N2 - We propose a new model that estimates the long- and short-run components of the variances and covariances. The advantage of our model to the existing DCC-based models is that it uses the same form for both the variances and covariances and estimates these moments simultaneously. We apply this model to obtain long- and short-run factor betas for industry test portfolios. We find that the risk premium related to the short-run market beta is significantly positive, irrespective of the choice of test portfolio. Further, the risk premia for the short-run betas of all the risk factors are significant outside recessions.

AB - We propose a new model that estimates the long- and short-run components of the variances and covariances. The advantage of our model to the existing DCC-based models is that it uses the same form for both the variances and covariances and estimates these moments simultaneously. We apply this model to obtain long- and short-run factor betas for industry test portfolios. We find that the risk premium related to the short-run market beta is significantly positive, irrespective of the choice of test portfolio. Further, the risk premia for the short-run betas of all the risk factors are significant outside recessions.

KW - Component GARCH model

KW - Long-run betas

KW - MIDAS

KW - Risk premia

KW - Short-run betas

U2 - 10.1016/j.intfin.2021.101412

DO - 10.1016/j.intfin.2021.101412

M3 - Journal article

SN - 1042-4431

VL - 74

JO - Journal of International Financial Markets, Institutions & Money

JF - Journal of International Financial Markets, Institutions & Money

M1 - 101412

ER -