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|Testing and comparing conditional risk‐return relationship with a new approach in the cross‐sectional framework
Alexandridis, Antonios K.
|FRASCATI::Social sciences::Economics and Business::Finance
|International Journal of Finance and Economics
|This paper presents an innovative approach in examining the conditional relationship between beta and returns for stocks traded on S&P 500 for the period from July 2001 to June 2011. We challenge other competitive models with portfolios formed based on the book value per share and betas using monthly data. A novel approach for capturing time variation in betas whose pattern is treated as a function of market returns is developed and presented. The estimated coefficients of a nonlinear regression constitute the basis of creating a two factor model. Our results indicate that the proposed specification surpasses alternative models in explaining the cross-section of returns. The implications of this study show that the proposed new risk factors that found to be significant both in time series and cross-section analyses provide valuable information in better understanding the characteristics of returns, targeting the reinforcement of stock market efficiency, and the capital allocation procedure.
|Appears in Collections:
|Department of Accounting & Finance
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|Preprint-Testing and comparing conditional CAPM_Revised.pdf
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