Before revision: It has been well known in financial economics that factor betas depend on observed instruments such as firm specific characteristics and macroeconomic variables, and a key object of interest is the effect of instruments on the factor betas. One of the key features of our model is that we specify the factor betas as functions of time-varying observed instruments that pick up long-run beta fluctuations, plus an orthogonal idiosyncratic component that captures high-frequency movements in beta .
After revision: It has been well known in financial economics that factor betas depend on observed instruments such as firm specific characteristics and macroeconomic variables, and their effects pick up long-run time-varying beta fluctuations. We specify the factor betas as functions of time-varying observed instruments that pick up long-run beta fluctuations, plus an orthogonal idiosyncratic component that captures high-frequency movements in beta .