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Testing and comparing conditional risk-return relationship with a new approach in the cross-sectional framework

Messis, Petros, Alexandridis, Antonis, Zapranis, Achilleas (2019) Testing and comparing conditional risk-return relationship with a new approach in the cross-sectional framework. International Journal of Finance and Economics, . ISSN 1076-9307. (doi:10.1002/ijfe.1786) (KAR id:77735)

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Official URL
http://dx.doi.org/10.1002/ijfe.1786

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.

Item Type: Article
DOI/Identification number: 10.1002/ijfe.1786
Uncontrolled keywords: Cross-sectional regression; CAPM; S&P 500
Divisions: Divisions > Kent Business School - Division > Kent Business School (do not use)
Depositing User: Antonis Alexandridis
Date Deposited: 23 Oct 2019 08:28 UTC
Last Modified: 11 Dec 2021 00:00 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/77735 (The current URI for this page, for reference purposes)
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