Continuous-Time Fama-MacBeth Regressions
57 Pages Posted: 17 Sep 2020 Last revised: 13 May 2023
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Continuous-Time Fama-MacBeth Regressions
Inference on Risk Premia in Continuous-Time Asset Pricing Models
Date Written: May 12, 2023
Abstract
We develop asymptotic theory to conduct inference on continuous-time asset pricing models using high-frequency individual equity returns over an increasing time horizon. We study the identification and estimation of risk premia for continuous and jump risk components, extending the Fama-MacBeth two-pass regression approach from the classical discrete-time setting to a continuous-time factor model with general dynamics for the factors, idiosyncratic components and factor loadings. This approach bypasses the need for index options or derivatives, which are only informative about market factor jumps. Our empirical analysis of US equities highlights the salient role of jump risk premia in expected returns.
Keywords: Fama-MacBeth, two-pass regression, cross-section of expected returns, arbitrage pricing theory, high frequency data, semimartingales
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