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Factor models of stock returns: GARCH errors versus time-varying betas

Koundouri, Phoebe, Kourogenis, Nikolaos, Pittis, Nikitas and Samartzis, Panagiotis (2016) Factor models of stock returns: GARCH errors versus time-varying betas. Journal of Forecasting, 35 (5). pp. 445-461. ISSN 0277-6693

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Identification Number: 10.1002/for.2387

Abstract

This paper investigates the implications of time-varying betas in factor models for stock returns. It is shown that a single-factor model (SFMT) with autoregressive betas and homoscedastic errors (SFMT-AR) is capable of reproducing the most important stylized facts of stock returns. An empirical study on the major US stock market sectors shows that SFMT-AR outperforms, in terms of in-sample and out-of-sample performance, SFMT with constant betas and conditionally heteroscedastic (GARCH) errors, as well as two multivariate GARCH-type models.

Item Type: Article
Official URL: http://onlinelibrary.wiley.com/journal/10.1002/(IS...
Additional Information: © 2015 John Wiley & Sons, Ltd.
Divisions: Grantham Research Institute
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
JEL classification: C - Mathematical and Quantitative Methods > C2 - Econometric Methods: Single Equation Models; Single Variables > C22 - Time-Series Models
G - Financial Economics > G1 - General Financial Markets > G10 - General
G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
Sets: Research centres and groups > Grantham Research Institute on Climate Change and the Environment
Collections > Economists Online
Date Deposited: 29 Feb 2016 09:30
Last Modified: 20 Mar 2019 02:54
URI: http://eprints.lse.ac.uk/id/eprint/65548

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