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Factor Models as 'Explanatory Unifiers' versus 'Explanatory Ideals' of Empirical Regularities of Stock Returns

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Listed:
  • Phoebe Koundouri
  • Nikolaos Kourogenis

    (Department of Banking and Financial Management, University of Piraeus.)

  • Nikitas Pittis

    (University of Piraeus, Greece)

  • Panagiotis Samartzis

Abstract

In this paper we investigate whether the empirical regularities of stock returns are independent of each other or whether any one of them implies all the others. If such a regularity exists, it is called 'fundamental' and is usually thought of as a 'deductive explanation' of the others. We demonstrate that such a fundamental regularity of stock returns is the one represented by the single factor model with a stochastically persistent beta coefficient (SFM- AR). Indeed, this regularity alone entails all the usual regularities of stock returns, including conditional heteroskedasticity, leptokurtosis aggregational Gaussianity and aggregational Independence. Hence, SFM-AR may be thought of as an "explanatory unifier" of the empirical regularities of stock returns. However, since the theoretical origins of SFM-AR are weak, its explanatory status falls short of meeting the standards of the 'ideal explanatory text'.

Suggested Citation

  • Phoebe Koundouri & Nikolaos Kourogenis & Nikitas Pittis & Panagiotis Samartzis, 2015. "Factor Models as 'Explanatory Unifiers' versus 'Explanatory Ideals' of Empirical Regularities of Stock Returns," DEOS Working Papers 1507, Athens University of Economics and Business.
  • Handle: RePEc:aue:wpaper:1507
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    References listed on IDEAS

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    More about this item

    Keywords

    empirical regularities; stock returns; single factor model; autoregressive beta; statistical explanation.;
    All these keywords.

    JEL classification:

    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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