The Conditional Relation between Fama-French Betas and Return
- 1 January 2010
- preprint
- Published by Elsevier in SSRN Electronic Journal
Abstract
According to asset pricing theory, in expectation there is a positive reward for taking risks. However, using realized returns, this relation is frequently reversed. In order to take this into account, we apply a conditional approach to the predominant model in asset pricing, the Fama-French three-factor model. We find that all three risk factors cross-sectionally drive asset returns. While other papers stop their analysis at this point, we extend the test developed by Freeman and Guermat (2006) to multifactor models and test if risk premia are priced within the conditional approach. Our test leads to qualitatively identical results as the widely used Fama-MacBeth test and hence confirms its validity.Keywords
This publication has 35 references indexed in Scilit:
- An Alternative Three-Factor ModelSSRN Electronic Journal, 2011
- An asymptotically distribution-free test of symmetryJournal of Statistical Planning and Inference, 2007
- Downside RiskThe Review of Financial Studies, 2006
- Liquidity and Asset PricesFoundations and Trends® in Finance, 2005
- Multifactor Explanations of Asset Pricing AnomaliesThe Journal of Finance, 1996
- Common risk factors in the returns on stocks and bondsJournal of Financial Economics, 1993
- The Cross-Section of Expected Stock ReturnsThe Journal of Finance, 1992
- Asset pricing and the bid-ask spreadJournal of Financial Economics, 1986
- The relationship between return and market value of common stocksJournal of Financial Economics, 1981
- Risk, Return, and Equilibrium: Empirical TestsJournal of Political Economy, 1973