English, Article edition: A Dynamic Asset Pricing Model with Time-Varying Factor and Idiosyncratic Risk Paskalis Glabadanidis

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  • article
Language
  • English

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Title
  • A Dynamic Asset Pricing Model with Time-Varying Factor and Idiosyncratic Risk
Author
  • Paskalis Glabadanidis
Physical Description
  • article
Notes
  • 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. Copyright The Author 2009. Published by Oxford University Press. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.
  • RePEc:oup:jfinec:v:7:y:2009:i:3:p:247-264
Language
  • English
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