How Do Alphas and Betas Move? Uncertainty, Learning and Time Variation in Risk Loadings

22 Pages Posted: 8 Mar 2014

Multiple version iconThere are 2 versions of this paper

Date Written: April 2014

Abstract

I employ a parsimonious model with learning, but without conditioning information, to extract time‐varying measures of market‐risk sensitivities, pricing errors and pricing uncertainty. The evolution of these quantities has interesting implications for macroeconomic dynamics. Parameters estimated for US equity portfolios display significant low‐frequency fluctuations, along patterns that change across size and book‐to‐market stocks. Time‐varying betas display superior predictive accuracy for returns against constant and rolling‐window OLS estimates. As to the relationship of betas with business‐cycle variables, value stocks’ betas move pro‐cyclically, unlike those of growth stocks. Investment growth, rather than consumption, predicts the betas of value and small‐firm portfolios.

JEL Classification: C48, E44, G11

Suggested Citation

Trecroci, Carmine, How Do Alphas and Betas Move? Uncertainty, Learning and Time Variation in Risk Loadings (April 2014). Oxford Bulletin of Economics and Statistics, Vol. 76, Issue 2, pp. 257-278, 2014, Available at SSRN: https://ssrn.com/abstract=2406267 or http://dx.doi.org/10.1111/obes.12018

Carmine Trecroci (Contact Author)

University of Brescia ( email )

Via San Faustino 74B
Brescia, 25122
Italy

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