Learning about beta
time-varying factor loadings, expected returns, and the conditional CAPM
Additional information
Authors
Adrian T.,
Franzoni F.
Type
Journal Article
Year
2009
Language
English
Abstract
We amend the conditional CAPM to allow for unobservable long-run changes in risk factor loadings. In this environment, investors rationally “learn” the long-run level of factor loadings from the observation of realized returns. As a consequence of this assumption, we model conditional betas using the Kalman filter. Because of its focus on low-frequency variation in betas, our approach circumvents recent criticisms of the conditional CAPM. When tested on portfolios sorted by size and book-to-market, our learning-augmented conditional CAPM passes the specification tests.
Keywords
Beta, CAPM, kalman filter, anomalies, value premium
Journal
Journal of empirical finance
Volume
16
Number ( Month )
4
Pages (or article number)
537-556
Diffusion
License
License undefined
Visibility
Public
Status open access
Green
