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Title: Testing and comparing conditional risk‐return relationship with a new approach in the cross‐sectional framework
Authors: Messis, Petros
Alexandridis, Antonios K.
Zapranis, Achilleas
Type: Article
Subjects: FRASCATI::Social sciences::Economics and Business::Finance
Keywords: cross-sectional regression
S&P 500
Issue Date: 2021
Source: International Journal of Finance and Economics
Volume: 26
Issue: 1
First Page: 218
Last Page: 240
Abstract: 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.
ISSN: 1076-9307
Other Identifiers: 10.1002/ijfe.1786
Appears in Collections:Department of Accounting & Finance

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