Working Paper: NBER ID: w19969
Authors: Esben Hedegaard; Robert J. Hodrick
Abstract: Asset pricing models such as the conditional CAPM are typically estimated with MLE using a monthly or quarterly horizon with data sampled to match the horizon even though daily data are available. We develop an overlapping data inference methodology (ODIN) that uses all of the data while maintaining the monthly or quarterly forecasting period, and we apply it to the conditional CAPM. Our approach recognizes that the first order conditions of MLE can be used as orthogonality conditions of GMM. Using historical data, we find considerable differences in the estimates from the non-overlapping samples that begin on different days.
Keywords: risk-return tradeoff; conditional CAPM; overlapping data inference; GMM; asset pricing
JEL Codes: G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| conditional CAPM (G12) | conditional mean of market return (G17) |
| conditional CAPM (G12) | conditional variance of market return (G17) |
| ODIN methodology (C67) | rejecting null hypothesis of no risk-return tradeoff (G40) |
| variability in non-overlapping estimates based on different starting dates (C41) | importance of ODIN approach (O00) |
| traditional methods (C90) | existence of risk-return tradeoff (G11) |