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Common Risk Factors in the Returns on Stocks, Bonds (and Options), Redux

Author

Listed:
  • Zhongtian Chen
  • Nikolai Roussanov
  • Xiaoliang Wang
  • Dongchen Zou

Abstract

We identify a strong common risk factor structure that is pervasive across corporate securities: stocks, corporate bonds, and options. The common factors are closely linked to observable factors and key economic indicators. These factors explain much of the variation in individual asset returns, although pricing errors persist. A joint mean-variance efficient portfolio across asset classes achieves a high Sharpe ratio, resulting in part from cross-market hedging of the common sources of risk. We develop a measure of market segmentation based on differences in the common factor risk premia between markets and document a significant degree of segmentation.

Suggested Citation

  • Zhongtian Chen & Nikolai Roussanov & Xiaoliang Wang & Dongchen Zou, 2026. "Common Risk Factors in the Returns on Stocks, Bonds (and Options), Redux," NBER Working Papers 35579, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:35579
    Note: AP CF EFG
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    More about this item

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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