The conditional Fama-French model and endogenous illiquidity: A robust instrumental variables test

English version

Autoři: François-Éric Racicot ^aff001; William F. Rentz ^aff001; David Tessier ^aff003; Raymond Théoret ^aff004
Působiště autorů: Telfer School of Management, University of Ottawa, Ottawa, ON, Canada ^aff001; Affiliate Research Fellow, IPAG Business School, Paris, France ^aff002; Département des Sciences Administratives, Université du Québec en Outaouais (UQO), Gatineau, QC, Canada ^aff003; Ecole des Sciences de la Gestion, Université du Québec à Montréal (ESG-UQAM), Montréal, QC, Canada ^aff004; Chaire d’information Financière et Organisationnelle, ESG-UQAM, Montreal, QC, Canada ^aff005
Vyšlo v časopise: PLoS ONE 14(9)
Kategorie: Research Article
prolekare.web.journal.doi_sk: https://doi.org/10.1371/journal.pone.0221599

Souhrn

We investigate conditional specifications of the five-factor Fama-French (FF) model, augmented with traditional illiquidity measures. The motivation for this time-varying methodology is that the traditional static approach of the FF model may be misspecified, especially for the endogenous illiquidity measures. We focus on the time-varying nature of the Jensen performance measure α and the market systematic risk sensitivity β, as these parameters are essentially universal in asset pricing models. To tackle endogeneity and other specification errors, we rely on our robust instrumental variables (RIV) algorithm implemented via a GMM approach. In this dynamic or time-varying conditional context, we generally find that the most significant factor is the market one, but illiquidity may matter depending on which states or estimation methods we consider. In particular, sectors whose returns embed a market illiquidity premium are more exposed to a binding funding constraint in times of crisis, which leads to deleveraging and a resulting decrease in systematic risk.

Klíčová slova:

Physical sciences – Research and analysis methods – Social sciences – Mathematics – Probability theory – Simulation and modeling – Economics – Statistics – Mathematical and statistical techniques – Statistical methods – Applied mathematics – Algorithms – Finance – Probability distribution – Skewness – Economic analysis – Kalman filter – Public finance – Money supply and banking – Financial markets – Econometrics – Mathematical economics – Instrumental variable analysis

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The conditional Fama-French model and endogenous illiquidity: A robust instrumental variables test

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