An Unconditional Asset‐Pricing Test and the Role of Firm Size as an Instrumental Variable for Risk

An Unconditional Asset‐Pricing Test and the Role of Firm Size as an Instrumental Variable for Risk ABSTRACT In an intertemporal economy where both risk (stock beta) and expected return are time varying, the authors derive a linear relation between the unconditional beta and the unconditional return under certain stationarity assumptions about the stochastic process of size‐portfolio betas. The model suggests the use of long time periods to estimate the unconditional portfolio betas. The authors find that, after controlling for the betas thus estimated, a firm‐size proxy, such as the logarithm of the firm size, does not have explanatory power for the averaged returns across the size‐ranked portfolios. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

An Unconditional Asset‐Pricing Test and the Role of Firm Size as an Instrumental Variable for Risk

The Journal of Finance, Volume 43 (2) – Jun 1, 1988

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Publisher
Wiley
Copyright
1988 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
D.O.I.
10.1111/j.1540-6261.1988.tb03941.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT In an intertemporal economy where both risk (stock beta) and expected return are time varying, the authors derive a linear relation between the unconditional beta and the unconditional return under certain stationarity assumptions about the stochastic process of size‐portfolio betas. The model suggests the use of long time periods to estimate the unconditional portfolio betas. The authors find that, after controlling for the betas thus estimated, a firm‐size proxy, such as the logarithm of the firm size, does not have explanatory power for the averaged returns across the size‐ranked portfolios.

Journal

The Journal of FinanceWiley

Published: Jun 1, 1988

References

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