Bayesian Analysis of Stochastic Betas

AbstractWe propose a mean-reverting stochastic process for the market beta. In a simulation study, the proposed model generates significantly more precise beta estimates than GARCH betas, betas conditioned on aggregate or firm-level variables, and rolling regression betas, even when the true betas are generated based on these competing specifications. Our model significantly improves out-of-sample hedging effectiveness. In asset pricing tests, our model provides substantially stronger support for the conditional CAPM relative to competing beta models and helps resolve asset pricing anomalies such as the size, book-to-market, and idiosyncratic volatility effects in the cross section of stock returns.

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Testing International Asset Pricing Models Using Implied Costs of Capital

Journal of Financial and Quantitative Analysis ◽

10.1017/s0022109009090164 ◽

2009 ◽

Vol 44 (2) ◽

pp. 307-335 ◽

Cited By ~ 104

Author(s):

Charles Lee ◽

David Ng ◽

Bhaskaran Swaminathan

Keyword(s):

Asset Pricing ◽

World Market ◽

Idiosyncratic Volatility ◽

Expected Returns ◽

International Asset Pricing ◽

Pricing Models ◽

Firm Level ◽

Economic Relations ◽

Asset Pricing Models ◽

Market Beta

AbstractThis paper tests international asset pricing models using firm-level expected returns estimated from an implied cost of capital approach. We show that the implied approach provides clear evidence of economic relations that would otherwise be obscured by the noise in realized returns. Among G-7 countries, expected returns based on implied costs of capital have less than one-tenth the volatility of those based on realized returns. Our tests show that firm-level expected returns increase with world market beta, idiosyncratic volatility, financial leverage, and book-to-market ratios, and decrease with currency beta and firm size.

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The Conditional CAPM Does Not Explain Asset-Pricing Anomalies

CFA Digest ◽

10.2469/dig.v37.n2.4599 ◽

2007 ◽

Vol 37 (2) ◽

pp. 50-51

Author(s):

C. Mitchell Conover

Keyword(s):

Asset Pricing ◽

Conditional Capm ◽

Asset Pricing Anomalies ◽

Pricing Anomalies

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Asset-Pricing Anomalies at the Firm Level

SSRN Electronic Journal ◽

10.2139/ssrn.1570856 ◽

2010 ◽

Author(s):

Scott Cederburg ◽

Phil R. Davies ◽

Michael S. O'Doherty

Keyword(s):

Asset Pricing ◽

Firm Level ◽

Asset Pricing Anomalies ◽

Pricing Anomalies

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Real-Time Profitability of Published Anomalies: An Out-of-Sample Test

Quarterly Journal of Finance ◽

10.1142/s201013921350016x ◽

2013 ◽

Vol 03 (03n04) ◽

pp. 1350016 ◽

Cited By ~ 3

Author(s):

Jing-Zhi Huang ◽

Zhijian Huang

Keyword(s):

Asset Pricing ◽

Transaction Costs ◽

Real Time ◽

Empirical Evidence ◽

Equity Market ◽

Data Snooping ◽

Asset Pricing Anomalies ◽

Pricing Anomalies ◽

Out Of Sample ◽

Sample Test

Empirical evidence on the out-of-sample performance of asset-pricing anomalies is mixed so far and arguably is often subject to data-snooping bias. This paper proposes a method that can significantly reduce this bias. Specifically, we consider a long-only strategy that involves only published anomalies and non-forward-looking filters and that each year recursively picks the best past-performer among such anomalies over a given training period. We find that this strategy can outperform the equity market even after transaction costs. Overall, our results suggest that published anomalies persist even after controlling for data-snooping bias.

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Optimisation of Time-Varying Asset Pricing Models with Penetration of Value at Risk and Expected Shortfall

Mathematics ◽

10.3390/math9040394 ◽

2021 ◽

Vol 9 (4) ◽

pp. 394

Author(s):

Adeel Nasir ◽

Kanwal Iqbal Khan ◽

Mário Nuno Mata ◽

Pedro Neves Mata ◽

Jéssica Nunes Martins

Keyword(s):

At Risk ◽

Asset Pricing ◽

Stock Returns ◽

Value At Risk ◽

Expected Shortfall ◽

Time Varying ◽

Pricing Models ◽

Asset Pricing Model ◽

Asset Pricing Models ◽

Market Beta

This study aims to apply value at risk (VaR) and expected shortfall (ES) as time-varying systematic and idiosyncratic risk factors to address the downside risk anomaly of various asset pricing models currently existing in the Pakistan stock exchange. The study analyses the significance of high minus low VaR and ES portfolios as a systematic risk factor in one factor, three-factor, and five-factor asset pricing model. Furthermore, the study introduced the six-factor model, deploying VaR and ES as the idiosyncratic risk factor. The theoretical and empirical alteration of traditional asset pricing models is the study’s contributions. This study reported a strong positive relationship of traditional market beta, value at risk, and expected shortfall. Market beta pertains its superiority in estimating the time-varying stock returns. Furthermore, value at risk and expected shortfall strengthen the effects of traditional beta impact on stock returns, signifying the proposed six-factor asset pricing model. Investment and profitability factors are redundant in conventional asset pricing models.

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Patent Thickets, Stock Returns, and Conditional CAPM

Management Science ◽

10.1287/mnsc.2021.4229 ◽

2022 ◽

Author(s):

Po-Hsuan Hsu ◽

Hsiao-Hui Lee ◽

Tong Zhou

Keyword(s):

Asset Pricing ◽

Stock Returns ◽

Capital Asset Pricing ◽

Stochastic Discount Factor ◽

Aggregate Productivity ◽

Capital Asset ◽

Conditional Capm ◽

Asset Pricing Model ◽

Patent Rights ◽

Patent Thickets

Patent thickets, a phenomenon of fragmented ownership of overlapping patent rights, hamper firms’ commercialization of patents and thus deliver asset pricing implications. We show that firms with deeper patent thickets are involved in more patent litigations, launch fewer new products, and become less profitable in the future. These firms are also associated with lower subsequent stock returns, which can be explained by a conditional Capital Asset Pricing Model (CAPM) based on a general equilibrium model that features heterogeneous market betas conditional on time-varying aggregate productivity. This explanation is supported by further evidence from factor regressions and stochastic discount factor tests. This paper was accepted by Karl Diether, finance.

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