Finance Seminar – Joint with SAFE

When:12 February 2013
, 17:15
 - 18:30

Speaker: Amit Goyal, University of Lausanne

Title: Cross-Sectional Asset Pricing with Individual Stocks: Betas versus Characteristics

Abstract:

We develop a methodology for estimating bias-corrected premium estimates from cross-sectional regressions of individual stock returns on time-varying conditional betas. For a comprehensive sample of stocks over the  post-war period  from  1946  through  2011,  we  find  fairly  consistent evidence  of    positive  risk  premium  on  the  size  factor,  but  limited  evidence  for  the book-to-market and momentum factors (none for the market factor). Firm characteristics explain a much larger  proportion  of  variation  in  estimated expected  returns  than  factor  loadings  when  return premia are taken to be constant. However, we find evidence of predictability in the premia for characteristics as well as loadings. Taking this into account, the gap between characteristics and loadings narrows (56% versus 44%) for the three-factor model and loadings take the lead (56% to 39%) with the addition of the momentum factor.