Dynamic model slashes pricing errors by 30% for industry portfolios.
The study introduces a new model that considers changes in risk and factor loadings over time to improve existing pricing models. By incorporating these dynamic elements, the model outperforms traditional models in pricing industry portfolios and reduces errors in size/book-to-market portfolios by 30%. Notably, the market beta of a value-minus-growth portfolio decreases when default premiums rise or during economic downturns.