On Stable Factor Structures in the Pricing of Risk: Do Time-Varying Betas Help or Hurt?
Article first published online: 17 DEC 2002
The American Finance Association 1998
The Journal of Finance
Volume 53, Issue 2, pages 549–573, April 1998
How to Cite
Ghysels, E. (1998), On Stable Factor Structures in the Pricing of Risk: Do Time-Varying Betas Help or Hurt?. The Journal of Finance, 53: 549–573. doi: 10.1111/0022-1082.224803
- Issue published online: 17 DEC 2002
- Article first published online: 17 DEC 2002
- Cited By
There is now considerable evidence suggesting that estimated betas of unconditional capital asset pricing models (CAPMs) exhibit statistically significant time variation. Therefore, many have advocated the use of conditional CAPMs. If we succeed in capturing the dynamics of beta risk, we are sure to outperform constant beta models. However, if the beta risk is inherently misspecified, there is a real possibility that we commit serious pricing errors, potentially larger than with a constant traditional beta model. In this paper we show that this is indeed the case, namely that pricing errors with constant traditional beta models are smaller than with conditional CAPMs.