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Sources of systematic risk

Author

Listed:
  • Makarov, Igor
  • Papanikolaou, D.

Abstract

Using the restrictions implied by the heteroskedasticity of stock returns, we identify four factors in the U.S. industry returns. The first correlates highly with the market portfolio; the second is a portfolio of stocks that produce investment goods minus stocks that produce consumption goods; the third differentiates between cyclical and noncyclical stocks. The fourth, a portfolio of industries that produce input goods minus the rest of the market, is a robust predictor of excess returns on the market portfolio and bond returns. The extracted factors are shown to contain significant information about future macroeconomic and financial variables.

Suggested Citation

  • Makarov, Igor & Papanikolaou, D., 2008. "Sources of systematic risk," LSE Research Online Documents on Economics 53906, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:53906
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    File URL: http://eprints.lse.ac.uk/53906/
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    References listed on IDEAS

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    More about this item

    Keywords

    factor analysis; identification; heteroscedasticity;

    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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