Staff Reports
Regression-Based Estimation of Dynamic Asset Pricing Models
Previous title: “Efficient Regression-Based Estimation of Dynamic Asset Pricing Models”
May 2011 Number 493
Revised: December 2014
JEL classification: G10, G12, C58

Authors: Tobias Adrian, Richard K. Crump, and Emanuel Moench

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 test. 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 risks that are found to be quantitatively more important than time-varying betas in reducing pricing errors.

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For a published version of this report, see Tobias Adrian, Richard Crump, and Emanuel Moench, "Regression-Based Estimation of Dynamic Asset Pricing Models," Journal of Financial Economics 118, no. 2 (November 2015): 211-244.
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