Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/214971 
Year of Publication: 
2019
Series/Report no.: 
CESifo Working Paper No. 7969
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
We introduce a methodology which deals with possibly integrated variables in the specification of the betas of conditional asset pricing models. In such a case, any model which is directly derived by a polynomial approximation of the functional form of the conditional beta will inherit a nonstationary right hand side. Our approach uses the cointegrating relationships between the integrated variables in order to maintain the stationarity of the right hand side of the estimated model, thus, avoiding the issues that arise in the case of an unbalanced regression. We present an example where our methodology is applied to the returns of funds-of-funds which are based on the Morningstar mutual fund ranking system. The results provide evidence that the residuals of possible cointegrating relationships between integrated variables in the specification of the conditional betas may reveal significant information concerning the dynamics of the betas.
Subjects: 
conditional CAPM
time-varying beta
cointegration
Morningstar star-rating system
JEL: 
G10
G23
C10
Document Type: 
Working Paper
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