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Positive Portfolio Factors

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  • Stephen J. Brown

    ()
    (NYU Stern School of Business)

  • William N. Goetzmann

    ()
    (Yale School of Management, International Center for Finance)

  • Mark Grinblatt

    ()
    (University of California, Los Angeles - Finance Area)

Abstract

We use an iterative relocation algorithm to identify factors in common stock returns. The benefit of the approach is that factors are portfolios of assets with non-negative weights. As a result, they are readily interpretable in terms of the characteristics of the underlying securities. The positive portfolio factors have comparatively high explanatory power in sample and out of sample. We find evidence of a size factor and factors identified with certain industries. Factors extracted from the mutual fund universe perform marginally better than factors from the universe of equities.

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Bibliographic Info

Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm27.

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Date of creation: 05 Mar 2004
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Handle: RePEc:ysm:somwrk:ysm27

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Web page: http://icf.som.yale.edu/
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  1. Grinblatt, Mark & Titman, Sheridan, 1983. "Factor pricing in a finite economy," Journal of Financial Economics, Elsevier, vol. 12(4), pages 497-507, December.
  2. William N. Goetzmann & Stephen J. Brown, 1998. "Mutual Fund Styles," Yale School of Management Working Papers ysm40, Yale School of Management.
  3. Josef Lakonishok & Robert W. Vishny & Andrei Shleifer, 1993. "Contrarian Investment, Extrapolation, and Risk," NBER Working Papers 4360, National Bureau of Economic Research, Inc.
  4. Connor, Gregory & Korajczyk, Robert A., 1988. "Risk and return in an equilibrium APT : Application of a new test methodology," Journal of Financial Economics, Elsevier, vol. 21(2), pages 255-289, September.
  5. Shanken, Jay, 1992. "On the Estimation of Beta-Pricing Models," Review of Financial Studies, Society for Financial Studies, vol. 5(1), pages 1-33.
  6. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
  7. Elton, Edwin J, et al, 1993. "Efficiency with Costly Information: A Reinterpretation of Evidence from Managed Portfolios," Review of Financial Studies, Society for Financial Studies, vol. 6(1), pages 1-22.
  8. Lehmann, Bruce N. & Modest, David M., 1988. "The empirical foundations of the arbitrage pricing theory," Journal of Financial Economics, Elsevier, vol. 21(2), pages 213-254, September.
  9. Brown, Stephen J, 1989. " The Number of Factors in Security Returns," Journal of Finance, American Finance Association, vol. 44(5), pages 1247-62, December.
  10. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
  11. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-36, May-June.
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Cited by:
  1. Brown, Stephen J. & Lajbcygier, Paul & Wong, Woon Weng, 2012. "Estimating the cost of capital with basis assets," Journal of Banking & Finance, Elsevier, vol. 36(11), pages 3071-3079.

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