Time-Invariance Coefficients Tests with the Adaptive Multi-Factor Model

• URL: http://arxiv.org/abs/2011.04171v2
• Date: Mon, 26 Apr 2021 00:53:33 GMT
• Title: Time-Invariance Coefficients Tests with the Adaptive Multi-Factor Model
• Authors: Liao Zhu, Robert A. Jarrow, Martin T. Wells
• Abstract summary: We compare the Adaptive Multi-Factor (AMF) model with the Fama-French 5-factor (FF5) model. We show that for nearly all time periods with length less than 6 years, the beta coefficients are time-invariant for the AMF model. This implies that the AMF model with a rolling window (such as 5 years) is more consistent with realized asset returns than is the FF5 model.
• Score: 0.0
• License: http://arxiv.org/licenses/nonexclusive-distrib/1.0/
• Abstract: The purpose of this paper is to test the time-invariance of the beta coefficients estimated by the Adaptive Multi-Factor (AMF) model. The AMF model is implied by the generalized arbitrage pricing theory (GAPT), which implies constant beta coefficients. The AMF model utilizes a Groupwise Interpretable Basis Selection (GIBS) algorithm to identify the relevant factors from among all traded ETFs. We compare the AMF model with the Fama-French 5-factor (FF5) model. We show that for nearly all time periods with length less than 6 years, the beta coefficients are time-invariant for the AMF model, but not for the FF5 model. This implies that the AMF model with a rolling window (such as 5 years) is more consistent with realized asset returns than is the FF5 model.

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