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Semiparametric estimation of a characteristic-based factor model of common stock returns

  • Connor, Gregory
  • Linton, Oliver

We introduce an alternative version of the Fama-French three-factor model of stockreturns together with a new estimation methodology. We assume that the factorbetas in the model are smooth nonlinear functions of observed securitycharacteristics. We develop an estimation procedure that combines nonparametrickernel methods for constructing mimicking portfolios with parametric nonlinearregression to estimate factor returns and factor betas simultaneously. Themethodology is applied to US common stocks and the empirical findings comparedto those of Fama and French.

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File URL: http://www.sciencedirect.com/science/article/pii/S0927-5398(06)00067-3
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Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 14 (2007)
Issue (Month): 5 (December)
Pages: 694-717

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Handle: RePEc:eee:empfin:v:14:y:2007:i:5:p:694-717
Contact details of provider: Web page: http://www.elsevier.com/locate/jempfin

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  1. Josef Lakonishok & Robert W. Vishny & Andrei Shleifer, 1993. "Contrarian Investment, Extrapolation, and Risk," NBER Working Papers 4360, National Bureau of Economic Research, Inc.
  2. Fama, Eugene F & French, Kenneth R, 1995. " Size and Book-to-Market Factors in Earnings and Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 131-55, March.
  3. Eugene F. Fama & Kenneth R. French, . "Value versus Growth: The International Evidence," CRSP working papers 341, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  4. MacKinlay, A. Craig, 1995. "Multifactor models do not explain deviations from the CAPM," Journal of Financial Economics, Elsevier, vol. 38(1), pages 3-28, May.
  5. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
  6. Basu, S, 1977. "Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis," Journal of Finance, American Finance Association, vol. 32(3), pages 663-82, June.
  7. 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.
  8. Pagan,Adrian & Ullah,Aman, 1999. "Nonparametric Econometrics," Cambridge Books, Cambridge University Press, number 9780521586115, june. pag.
  9. Robert Hodrick & David Ng & Paul Sengmueller, 1999. "An International Dynamic Asset Pricing Model," International Tax and Public Finance, Springer, vol. 6(4), pages 597-620, November.
  10. Brown, Stephen J, 1989. " The Number of Factors in Security Returns," Journal of Finance, American Finance Association, vol. 44(5), pages 1247-62, December.
  11. Fama, Eugene F & French, Kenneth R, 1996. " Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
  12. Daniel, Kent, et al, 1997. " Measuring Mutual Fund Performance with Characteristic-Based Benchmarks," Journal of Finance, American Finance Association, vol. 52(3), pages 1035-58, July.
  13. Daniel, Kent & Titman, Sheridan, 1997. " Evidence on the Characteristics of Cross Sectional Variation in Stock Returns," Journal of Finance, American Finance Association, vol. 52(1), pages 1-33, March.
  14. Connor, Gregory & Korajczyk, Robert A, 1993. " A Test for the Number of Factors in an Approximate Factor Model," Journal of Finance, American Finance Association, vol. 48(4), pages 1263-91, September.
  15. 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.
  16. 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.
  17. Davis, James L, 1994. " The Cross-Section of Realized Stock Returns: The Pre-COMPUSTAT Evidence," Journal of Finance, American Finance Association, vol. 49(5), pages 1579-93, December.
  18. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119, May.
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