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Are the Fama–French factors good proxies for latent risk factors? Evidence from the data of SHSE in China

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  • Lin, Jianhao
  • Wang, Meijin
  • Cai, Lingfeng
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    Abstract

    This paper applies the new procedure developed by Bai and Ng (2006a) to explore the relation between the Fama–French factors and the latent risk factors in China’s stock market. The results show that the Fama–French factors are good proxies for risk factors of portfolios. For individual stock, only the Market factor is appropriate to proxy risk factors, while the other proxies we consider are not.

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    Bibliographic Info

    Article provided by Elsevier in its journal Economics Letters.

    Volume (Year): 116 (2012)
    Issue (Month): 2 ()
    Pages: 265-268

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    Handle: RePEc:eee:ecolet:v:116:y:2012:i:2:p:265-268

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    Web page: http://www.elsevier.com/locate/ecolet

    Related research

    Keywords: Fama–French factors; Latent risk factors; Proxies; Principal components;

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    1. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    2. Goyal, Amit & Pérignon, Christophe & Villa, Christophe, 2008. "How common are common return factors across the NYSE and Nasdaq?," Journal of Financial Economics, Elsevier, vol. 90(3), pages 252-271, December.
    3. Bai, Jushan & Ng, Serena, 2006. "Evaluating latent and observed factors in macroeconomics and finance," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 507-537.
    4. Shanken, Jay, 1992. "On the Estimation of Beta-Pricing Models," Review of Financial Studies, Society for Financial Studies, vol. 5(1), pages 1-33.
    5. Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Econometric Society World Congress 2000 Contributed Papers 1504, Econometric Society.
    6. Jushan Bai & Serena Ng, 2006. "Confidence Intervals for Diffusion Index Forecasts and Inference for Factor-Augmented Regressions," Econometrica, Econometric Society, vol. 74(4), pages 1133-1150, 07.
    7. Jushan Bai, 2003. "Inferential Theory for Factor Models of Large Dimensions," Econometrica, Econometric Society, vol. 71(1), pages 135-171, January.
    8. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 147-62, April.
    9. Stock J.H. & Watson M.W., 2002. "Forecasting Using Principal Components From a Large Number of Predictors," Journal of the American Statistical Association, American Statistical Association, vol. 97, pages 1167-1179, December.
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    Cited by:
    1. Bianco, Dominique & Niang, Abdou-Aziz, 2012. "On International Spillovers," MPRA Paper 41046, University Library of Munich, Germany.

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