Skip Navigation


Journal of Financial Econometrics Advance Access originally published online on September 22, 2007
Journal of Financial Econometrics 2008 6(1):49-86; doi:10.1093/jjfinec/nbm018
This Article
Right arrow Full Text
Right arrow Full Text (PDF)
Right arrow All Versions of this Article:
6/1/49    most recent
nbm018v1
Right arrow Alert me when this article is cited
Right arrow Alert me if a correction is posted
Services
Right arrow Email this article to a friend
Right arrow Similar articles in this journal
Right arrow Alert me to new issues of the journal
Right arrow Add to My Personal Archive
Right arrow Download to citation manager
Right arrowRequest Permissions
Google Scholar
Right arrow Articles by Fan, X.
Right arrow Articles by Liu, M.
Social Bookmarking
Add to CiteULike   Add to Connotea   Add to Del.icio.us  
What's this?

© The Author 2007. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

Sorting, Firm Characteristics, and Time-varying Risk: An Econometric Analysis

Xinting Fan
     Sun Yat-sen University

Ming Liu
     Chinese University of Hong Kong

Address correspondence to Ming Liu, 2/F, K.K. Leung Building, Department of Finance, Chinese University of Hong Kong, Shatin, N.T., Hong Kong, or e-mail: LiuMing{at}baf.msmail.cuhk.edu.hk


  Abstract

We show that sorting reveals the time-varying market risk exposures of the firm-specific investment opportunity set. Sorting on the basis of firm characteristics uncovers information on firm-specific distress or growth, and this leads to more efficient estimation of conditional risk sensitivity. We demonstrate the effectiveness of the sorting methodology with an empirical exercise that tests the conditional capital asset pricing model (CAPM). When measured properly using sorting and firm characteristics, conditional betas, along with size and the book-market ratio, are significant drivers of expected returns.

KEYWORDS: sorting, time-varying risk, firm characteristics, size, book-market ratio

We thank Jia He and Harold Zhang, two anonymous referees, and participants of Financial Management Association 2003 meeting for their useful discussions and comments. All remaining errors are ours. This article was supported by the Research Grants Council of Hong Kong Competitive Earmarked Research Grant (CUHK4133/03H).

Received January 6, 2006; revised November 1, 2006; accepted August 15, 2007


Add to CiteULike CiteULike   Add to Connotea Connotea   Add to Del.icio.us Del.icio.us    What's this?




Disclaimer:
Please note that abstracts for content published before 1996 were created through digital scanning and may therefore not exactly replicate the text of the original print issues. All efforts have been made to ensure accuracy, but the Publisher will not be held responsible for any remaining inaccuracies. If you require any further clarification, please contact our Customer Services Department.