Learning about beta: time-varying factor loadings, expected returns, and the conditional CAPM

Tobias Adrian and Francesco Franzoni

No 193, Staff Reports from Federal Reserve Bank of New York

Abstract: We complement the conditional capital asset pricing model (CAPM) by introducing unobservable long-run changes in risk factor loadings. In this environment, investors rationally ?learn? the long-run level of factor loading by observing realized returns. As a direct consequence of this assumption, conditional betas are modeled using the Kalman filter. Because of its focus on low-frequency variation in betas, our approach circumvents recent criticisms of the conditional CAPM. When tested on portfolios sorted by size and book-to-market ratio, our learning-augmented conditional CAPM fails to be rejected. ; Original title: Learning about beta: a new look at CAPM tests.

Keywords: Investments; capital asset pricing model (search for similar items in EconPapers)
Date: 2008
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr193.pdf (application/pdf)
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr193.html (text/html)

Related works:
Journal Article: Learning about beta: Time-varying factor loadings, expected returns, and the conditional CAPM (2009)
Working Paper: Learning about Beta: Time-Varying Factor Loadings, Expected Returns,and the Conditional CAPM (2008)
Working Paper: Learning about Beta: time-varying factor loadings, expected returns and the conditional CAPM (2005)
Working Paper: Learning about Beta: Time-varying factor loadings, expected returns, and the Conditional CAPM (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fednsr:193

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Staff Reports from Federal Reserve Bank of New York Contact information at EDIRC.
Bibliographic data for series maintained by Gabriella Bucciarelli ().