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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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
Date Deposited:	29 Feb 2016 09:30
Last Modified:	07 Jan 2024 18:09
URI:	http://eprints.lse.ac.uk/id/eprint/65548

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