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Modelling Sector-Level Asset Prices

1
Smith School of Enterprise and the Environment, University of Oxford, South Parks Road, Oxford OX1 3QY, UK
2
Department of Accountancy & Finance, University of Otago, P.O. Box 56, Dunedin 9054, New Zealand
*
Author to whom correspondence should be addressed.
J. Risk Financial Manag. 2020, 13(6), 120; https://doi.org/10.3390/jrfm13060120
Received: 12 April 2020 / Revised: 28 May 2020 / Accepted: 6 June 2020 / Published: 10 June 2020
(This article belongs to the Special Issue Empirical Asset Pricing)
We present a modelling approach for sector asset pricing studies that incorporates sector-level risk factors, subgroup portfolios, and structural breakpoint tests that are better at isolating the time-varying nature and the firm-specific component of returns. Our results show considerable subsector heterogeneity, while the asset pricing model using local risk factors and inductive structural breaks results in a superior model ( R 2 of 80.42% relative to R 2 of 68.79% of “conventional” models). Finally, we show that some of the variances of residuals, normally assumed to be the firm-specific component of returns, can be attributed to the changing relationship between sector returns and risk factors. View Full-Text
Keywords: asset pricing; stock market; structural breaks; sector analysis asset pricing; stock market; structural breaks; sector analysis
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Tulloch, D.J.; Diaz-Rainey, I.; Premachandra, I.M. Modelling Sector-Level Asset Prices. J. Risk Financial Manag. 2020, 13, 120.

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