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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
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Official URL: http://dx.doi.org/10.1080/07350015.2015.1061436
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 | ||||||||||
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| Subjects: | H Social Sciences > HG Finance | ||||||||||
| Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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| 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: |
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| 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: |
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