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The dynamics of factor loadings in the cross-section of returns

Author

Listed:
  • Riccardo Borghi

    (Cass Business School)

  • Eric Hillebrand

    (Aarhus University and CREATES)

  • Jakob Mikkelsen

    (Danmarks Nationalbank)

  • Giovanni Urga

Abstract

In this paper, we propose a two-level factor model with time-varying loadings to investigate the dynamics of factor betas in the cross-section of returns of a large portfolio of 1815 firms from 54 countries over the period 2006-2016. The model contains a global observed financial factor and unobserved global and regional factors consistently estimated via principal component. When unexpected events happen globally, loadings on global factors increase. The dynamics of the global factor loadings is related to the profile of the firm. Loadings persistence is decreasing in firm size and expected returns are increasing in the variance of the loading.

Suggested Citation

  • Riccardo Borghi & Eric Hillebrand & Jakob Mikkelsen & Giovanni Urga, 2018. "The dynamics of factor loadings in the cross-section of returns," CREATES Research Papers 2018-38, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2018-38
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    More about this item

    Keywords

    High-dimensional factor models; financial; global and regional risk factors; time-varying loadings; systematic risk;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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