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Type: Journal article
Title: A Dynamic Asset Pricing Model with Time-Varying Factor and Idiosyncratic Risk
Author: Glabadanidis, P.
Citation: Journal of Financial Econometrics, 2009; 7(3):247-264
Publisher: Oxford University Press
Issue Date: 2009
ISSN: 1479-8409
Statement of
Paskalis Glabadanidis
Abstract: This paper uses a multivariate GARCH model to account for time variation in factor loadings and idiosyncratic risk in improving the performance of the CAPM and the three-factor Fama–French model. I show how to incorporate time variation in betas and the second moments of the residuals in a very general way. Both the static and conditional CAPM substantially outperform the three-factor model in pricing industry portfolios. Using a dynamic CAPM model results in a 30% reduction in the average absolute pricing error of size/book-to-market portfolios. Ad hoc analysis shows that the market beta of a value-minus-growth portfolio decreases whenever the default premium increases as well as during economic recessions.
Keywords: dynamic asset pricing; multivariate GARCH
Rights: © The Author 2009. Published by Oxford University Press. All rights reserved.
RMID: 0020103318
DOI: 10.1093/jjfinec/nbp006
Appears in Collections:Business School publications

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