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Macroeconomic factors strike back : a bayesian change-point model of time-varying risk exposures and premia in the U.S. cross-section

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Bianchi, Daniele, Guidolin, Massimo and Ravazzolo, Francesco (2017) Macroeconomic factors strike back : a bayesian change-point model of time-varying risk exposures and premia in the U.S. cross-section. Journal of Business and Economic Statistics, 35 (1). pp. 110-129. doi:10.1080/07350015.2015.1061436

An open access version can be found in:
  • SSRN
Official URL: http://dx.doi.org/10.1080/07350015.2015.1061436

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Abstract

This article proposes a Bayesian estimation framework for a typical multi-factor model with time-varying risk exposures to macroeconomic risk factors and corresponding premia to price U.S. publicly traded assets. The model assumes that risk exposures and idiosyncratic volatility follow a break-point latent process, allowing for changes at any point on time but not restricting them to change at all points. The empirical application to 40 years of U.S. data and 23 portfolios shows that the approach yields sensible results compared to previous two-step methods based on naive recursive estimation schemes, as well as a set of alternative model restrictions. A variance decomposition test shows that although most of the predictable variation comes from the market risk premium, a number of additional macroeconomic risks, including real output and inflation shocks, are significantly priced in the cross-section. A Bayes factor analysis massively favors the proposed change-point model. Supplementary materials for this article are available online.

Item Type: Journal Article
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Warwick Business School > Finance Group
Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH): Capital assets pricing model, Risk
Journal or Publication Title: Journal of Business and Economic Statistics
Publisher: Americal Statistical Association
ISSN: 0735-0015
Official Date: 2017
Dates:
DateEvent
2017Published
17 June 2014Updated
5 June 2015Accepted
20 September 2013Submitted
Volume: 35
Number: 1
Page Range: pp. 110-129
DOI: 10.1080/07350015.2015.1061436
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Restricted or Subscription Access
Open Access Version:
  • SSRN

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