Humboldt-Universität zu Berlin - High Dimensional Nonstationary Time Series

IRTG1792DP2020 020

Long- and Short-Run Components of Factor Betas: Implications for Stock Pricing

Hossein Asgharian
Charlotte Christiansen
Ai Jun Hou
Weining Wang

We propose a bivariate component GARCH-MIDAS model to estimate the long- and
short-run components of the variances and covariances. The advantage of our
model to the existing DCC-based models is that it uses the same form for both
the variances and covariances and that it estimates these moments
simultaneously. We apply this model to obtain long- and short-run factor betas
for industry test portfolios, where the risk factors are the market, SMB, and
HML portfolios. We use these betas in cross-sectional analysis of the risk
premia. Among other things, we find that the risk premium related to the short-
run market beta is significantly positive, irrespective of the choice of test
portfolio. Further, the risk premia for the short-run betas of all the risk
factors are significant outside recessions.

long-run betas; short-run betas; risk premia; business cycles; component GARCH
model; MIDAS

JEL Classification:
G12; C58; C51