Department of Economics and Business Economics

Testing conditional factor models

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Using nonparametric techniques, we develop a methodology for estimating and testing conditional alphas and betas and long-run alphas and betas, which are the averages of conditional alphas and betas, respectively, across time. The estimators and tests can be implemented for a single asset or jointly across portfolios. The traditional Gibbons, Ross, and Shanken (1989) test arises as a special case of no time variation in the alphas and factor loadings and homoskedasticity. As applications of the methodology, we estimate conditional CAPM and multifactor models on book-to-market and momentum decile portfolios. We reject the null that long-run alphas are equal to zero even though there is substantial variation in the conditional factor loadings of these portfolios.
Original languageEnglish
JournalJournal of Financial Economics
Volume106
Issue1
Pages (from-to)132-156
Number of pages25
ISSN0304-405X
DOIs
Publication statusPublished - 1 Oct 2012

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