Andrew Ang

Testing Conditional Factor Models

Coauthor(s): Dennis Kristensen.

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Abstract:
We develop a methodology for estimating time-varying factor loadings and conditional alphas and betas based on nonparametric techniques. We test whether conditional alphas and long-run alphas, which are averages of conditional alphas, are equal to zero and derive test statistics for the constancy of factor loadings. The tests can be performed for a single asset or jointly across portfolios. The traditional Gibbons, Ross and Shanken (1989) test arises as a special case no time variation in the alphas and factor loadings and homoskedasticity. As applications of the methodology, we estimate conditional CAPM and multifactor models on book-to-market and momentum decile portfolios. We reject the null that long-run alphas are equal to zero even though there is substantial variation in the conditional factor loadings of these portfolios.

Source: Working Paper
Exact Citation:
Ang, Andrew, and Dennis Kristensen. "Testing Conditional Factor Models." Working Paper, Columbia Business School, 2010.
Date: 2010