Articlegreen2018

Beta Matrix and Common Factors in Stock Returns

SEUNG CHAN AHN · Alex R. Horenstein · Na Wang

38 citations0/0 files storedJournal of Financial and Quantitative Analysis

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Financial Markets and Investment Strategies Financial Analysis and Corporate Governance Financial Risk and Volatility Modeling

Abstract

We consider the estimation methods for the rank of a beta matrix corresponding to a multifactor model and study which method would be appropriate for data with a large number of assets. Our simulation results indicate that a restricted version of Cragg and Donald’s (1997) Bayesian Information Criterion estimator is quite reliable for such data. We use this estimator to analyze some selected asset pricing models with U.S. stock returns. Our results indicate that the beta matrix from many models fails to have full column rank, suggesting that risk premiums in these models are under-identified.

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References

1993Common risk factors in the returns on stocks and bonds 1964CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*1997On Persistence in Mutual Fund Performance 1973Risk, Return, and Equilibrium: Empirical Tests 1993Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency 2014A five-factor asset pricing model 1965The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets 1976The arbitrage theory of capital asset pricing

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