Time-Invariance Coefficients Tests with the Adaptive Multi-Factor Model
This addresses the problem of model consistency in financial asset pricing for researchers and practitioners, though it appears incremental by comparing to an existing benchmark.
The paper tests the time-invariance of beta coefficients in the Adaptive Multi-Factor (AMF) model, showing that for nearly all time periods under 6 years, the AMF model's coefficients are time-invariant while the Fama-French 5-factor model's are not, making AMF more consistent with realized asset returns.
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.