Asset pricing in a multifactor setting

Cayirli O., Kayalidere K., AKTAŞ H.

Borsa Istanbul Review, cilt.22, sa.6, ss.1062-1068, 2022 (SSCI) identifier identifier

  • Yayın Türü: Makale / Tam Makale
  • Cilt numarası: 22 Sayı: 6
  • Basım Tarihi: 2022
  • Doi Numarası: 10.1016/j.bir.2022.08.001
  • Dergi Adı: Borsa Istanbul Review
  • Derginin Tarandığı İndeksler: Social Sciences Citation Index (SSCI), Scopus, EconLit, Directory of Open Access Journals
  • Sayfa Sayıları: ss.1062-1068
  • Anahtar Kelimeler: Asset pricing, Beta, CAPM, Multifactor models, Time -varying market risk premiums
  • Manisa Celal Bayar Üniversitesi Adresli: Evet

Özet

We mathematically show that, no matter how many factors are added to the capital asset pricing model (CAPM), beta will always matter. We also show that adding more factors to a single-factor CAPM requires market risk premiums to be modeled as time varying. In addition to allowing time-varying market risk premiums, our methodology can be extended to allow for time-varying systematic risk. Our approach offers a fairly simple way to estimate expected excess returns in a multifactor setting without the use of sorting methodologies. Our critique of multifactor models is mainly due to the fact that if at least one asset in the market portfolio is sensitive to a priced factor, then the market portfolio should also be sensitive to this factor.