Long- and Short-Run Components of Factor Betas: Implications for Equity Pricing
(with Hossein Agharian & Carlotte Christiansen & Weining Wang). SSRN version
We propose a new bivariate component GARCH model that simultaneously obtains factor betas’ long- and short-run components. We apply the model to industry portfolios using market, small-minus-big, and high-minus-low portfolios as risk factors. We find that the cross-sectional average and dispersion of the betas’ short-run component increase in bad states of the economy.Decomposing risk across horizons might help explain the anomaly that the market beta is typically not priced, as the risk premium related to the short-run market beta is significantly positive. This finding is robust to portfolio choice.
Effects of Economic Policy Uncertainty Shocks on the Long-Run US-UK Stock Market Correlation
(with Hossein Agharian & Carlotte Christiansen) SSRN version
We use the economic policy uncertainty indices of Baker, Bloom, and Davis (2016) in combination with themixed data sampling (MIDAS) approach to investigate the US and UK stock market movements. The long-runUS-UK stock market correlation depends positively on US economic policy uncertainty shocks. The US long-run stock market volatility depends significantly on the US economic policy uncertainty shocks but not on UK shocks while the UK depends significantly on both.