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Time-varying beta in functional factor models: Evidence from China
Affiliation:1. Department of Financial Engineering and Actuarial Mathematics, Soochow University, Taipei 10048, Taiwan;2. College of Management, Yuan Ze University, Taoyuan 32003, Taiwan;3. Department of Quantitative Finance, National Tsing Hua University, Hsinchu 30010, Taiwan;1. School of Securities and Futures, Southwestern University of Finance and Economics, China;2. Department of Finance, National Central University, No. 300, Jhongda Rd., Jhongli City, Taoyuan County 32001, Taiwan, ROC;3. School of Securities and Futures, Southwestern University of Finance and Economics, No. 55, Guanghuacun Street, Chengdu, Sichuan 610074, China;1. ISCAL – Lisbon Accounting and Business School, Instituto Politécnico de Lisboa, Av. Miguel Bombarda, 20, 1069-035 Lisbon, Portugal;2. SOCIUS – Research Centre in Economic and Organizational Sociology, CSG – Research in Social Sciences and Management, Rua Miguel Lupi, 20, 1249-078 Lisbon, Portugal;3. ISEG – Lisbon School of Economics and Management, Universidade de Lisboa, Portugal;4. UECE – Research Unit on Complexity and Economics, Rua Miguel Lupi, 20, 1249-078 Lisbon, Portugal
Abstract:In this paper, we introduce a functional method to investigate how betas change over time in factor models. Based on the China A-share data, we drop the constant beta assumption in the CAPM and multi-factor models to estimate the time-varying betas directly from the functional data regression. The empirical results show that exposures to all risk factors have certain time-varying patterns in the Chinese A-share stock market.
Keywords:Functional factor models  Time-varying beta  Functional regression  Risk factors  Basic functions
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