Continuous-Time Fama-MacBeth Regressions

57 Pages Posted: 17 Sep 2020 Last revised: 13 May 2023

See all articles by Yacine Ait-Sahalia

Yacine Ait-Sahalia

Princeton University - Department of Economics

Jean Jacod

Université Paris VI Pierre et Marie Curie

Dacheng Xiu

University of Chicago - Booth School of Business

Multiple version iconThere are 2 versions of this paper

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

Suggested Citation

Ait-Sahalia, Yacine and Jacod, Jean and Xiu, Dacheng, Continuous-Time Fama-MacBeth Regressions (May 12, 2023). Chicago Booth Research Paper No. 20-30, Available at SSRN: https://ssrn.com/abstract=3692604 or http://dx.doi.org/10.2139/ssrn.3692604

Yacine Ait-Sahalia

Princeton University - Department of Economics ( email )

Fisher Hall
Princeton, NJ 08544
United States
609-258-4015 (Phone)
609-258-5398 (Fax)

Jean Jacod

Université Paris VI Pierre et Marie Curie ( email )

4, Place Jussieu, B.P. 169
Laboratoire de Probabilites
F-75252-Paris Cedex 05
France
01 44 27 53 21 (Phone)

Dacheng Xiu (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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