Journal of Finance and Investment Analysis

Modeling the Time Variation in Factor Exposures

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• Abstract

   

  This paper offers new evidence on the dynamic behavior of multifactor models. Specifically, we investigate the significance and temporal stability of conditional factor betas in the context of multifactor asset pricing models. Using a Kalman filter approach, we find that conditional factor betas are dynamic and their statistical significance varies over time. Furthermore, the inclusion of more factors improves that statistical significance and time stability of the market factor.  Overall, our empirical results support the view that multifactors may not be independent risk factors but help to better identify the market factor.

   

  JEL classification numbers: G11; G12

  Keywords: Asset Pricing, Risk Factors.