Modelling Sector-Level Asset Prices
We present a modelling approach for sector asset pricing studies that incorporates sector-level risk factors, subgroup portfolios, and structural breakpoint tests that are better at isolating the time-varying nature and the firm-specific component of returns. Our results show considerable subsector...
| Main Authors: | , , |
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| Format: | Article |
| Language: | English |
| Published: |
MDPI AG
2020-06-01
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| Series: | Journal of Risk and Financial Management |
| Subjects: | |
| Online Access: | https://www.mdpi.com/1911-8074/13/6/120 |
| Summary: | We present a modelling approach for sector asset pricing studies that incorporates sector-level risk factors, subgroup portfolios, and structural breakpoint tests that are better at isolating the time-varying nature and the firm-specific component of returns. Our results show considerable subsector heterogeneity, while the asset pricing model using local risk factors and inductive structural breaks results in a superior model ( of 80.42% relative to of 68.79% of “conventional” models). Finally, we show that some of the variances of residuals, normally assumed to be the firm-specific component of returns, can be attributed to the changing relationship between sector returns and risk factors. |
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| ISSN: | 1911-8066 1911-8074 |