This article proposes a Bayesian estimation framework for a typical multi-factor model with time-varying risk exposures to macroeconomic risk factors and corresponding premia to price U.S. publicly traded assets. The model assumes that risk exposures and idiosyncratic volatility follow a break-point latent process, allowing for changes at any point on time but not restricting them to change at all points. The empirical application to 40 years of U.S. data and 23 portfolios shows that the approach yields sensible results compared to previous two-step methods based on naive recursive estimation schemes, as well as a set of alternative model restrictions. A variance decomposition test shows that although most of the predictable variation comes from the market risk premium, a number of additional macroeconomic risks, including real output and inflation shocks, are significantly priced in the cross-section. A Bayes factor analysis massively favors the proposed change-point model. Supplementary materials for this article are available online.
Macroeconomic factors strike back: a bayesian change-point model of time-varying risk exposures and premia in the U.S. cross-section
Bianchi, Daniele
;Guidolin, Massimo;
2017
Abstract
This article proposes a Bayesian estimation framework for a typical multi-factor model with time-varying risk exposures to macroeconomic risk factors and corresponding premia to price U.S. publicly traded assets. The model assumes that risk exposures and idiosyncratic volatility follow a break-point latent process, allowing for changes at any point on time but not restricting them to change at all points. The empirical application to 40 years of U.S. data and 23 portfolios shows that the approach yields sensible results compared to previous two-step methods based on naive recursive estimation schemes, as well as a set of alternative model restrictions. A variance decomposition test shows that although most of the predictable variation comes from the market risk premium, a number of additional macroeconomic risks, including real output and inflation shocks, are significantly priced in the cross-section. A Bayes factor analysis massively favors the proposed change-point model. Supplementary materials for this article are available online.File | Dimensione | Formato | |
---|---|---|---|
Bianchi Guidolin Ravazzolo JBES 2017.pdf
non disponibili
Tipologia:
Pdf editoriale (Publisher's layout)
Licenza:
NON PUBBLICO - Accesso privato/ristretto
Dimensione
1.63 MB
Formato
Adobe PDF
|
1.63 MB | Adobe PDF | Visualizza/Apri |
I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.