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The Risk and Return from Factors

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Author Info
Louis K. C. Chan
Jason Karceski
Josef Lakonishok
Abstract

The ability to identify which factors best capture systematic return covariation is central to applications of multifactor pricing models. This paper uses a common data set to evaluate the performance of various proposed factors in capturing return comovements. Factors associated with the market, size, past return, book-to-market and dividend yield help explain return comovement on an out-of-sample basis (although they are not necessarily associated with large premiums in average returns). Except for the default premium and the term premium, macroeconomic factors perform poorly. We document regularities in the behavior of the more important factors, and confirm their influence in the Japanese and U.K. markets as well.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6098.

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Date of creation: Jul 1997
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Handle: RePEc:nbr:nberwo:6098

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G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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