Faculty of Economics and Business Administration Publications Database

Regression-based estimation of dynamic asset pricing models

Adrian, Tobias
Crump, Richard K.
Volume: 118
Number: 2
Pages: 211 - 244
Month: November
ISSN-Print: 0304-405X
Link External Source: Online Version
Year: 2015
Keywords: Dynamic asset pricing; Fama-MacBeth regressions; Time-varying betas; Generalized method of moments; Minimum distance estimation; Reduced rank regression

We propose regression-based estimators for beta representations of dynamic asset pricing models with an affine pricing kernel specification. We allow for state variables that are cross-sectional pricing factors, forecasting variables for the price of risk, and factors that are both. The estimators explicitly allow for time-varying prices of risk, time-varying betas, and serially dependent pricing factors. Our approach nests the Fama-MacBeth two-pass estimator as a special case. We provide asymptotic multistage standard errors necessary to conduct inference for asset pricing tests. We illustrate our new estimators in an application to the joint pricing of stocks and bonds. The application features strongly time-varying, highly significant prices of risk that are found to be quantitatively more important than time-varying betas in reducing pricing errors.