Learning about beta
Subtitle: a new look at CAPM tests
By: Tobias Adrian, Francesco Franzoni.
Contributors: Franzoni, Francesco.; Federal Reserve Bank of New York.
Series: Staff reports ;; no. 193; Staff reports (Federal Reserve Bank of New York : Online) ;; no. 193.
Publisher: Federal Reserve Bank of New York
Published: 2004
Place of publication: [New York, N.Y.]
Language: eng
Format: Electronic resource
Subjects: Stocks -- Prices -- Mathematical models.; Capital assets pricing model.; Investments -- Psychological aspects -- Mathematical models.
Description: "When risk-factor loadings are time-varying and unobservable, investors are forced to form beliefs about the levels of their loadings.  The learning process involved in forming these beliefs has normative implications for asset-pricing tests.  This paper develops an equilibrium model of learning about time-varying beta.  In the model, the capital asset pricing model (CAPM) works for investors' probability distribution.  However, mis-pricing can be observed if econometricians estimate betas without accounting for the investors' learning process.  The empirical implication for asset-pricing tests is that the factor loadings must be estimated as latent variables.  We provide an empirical application of this methodology to the cross section of returns on ten book-to-market and ten size-sorted portfolios.  For these assets, the data do not reject a learning-augmented version of CAPM.  This model performs better than other common empirical specifications, including the Fama-French three-factor model"--Federal Reserve Bank of New York web site.
Notes: Includes bibliographical references.
Title from PDF file as viewed on 1/12/2005.
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Mode of access: World Wide Web.