Common Factors and Specific Factors
In this paper we study factor models for security returns on financial markets, where some pervasive factors are common across all securities and other pervasive factors prevail only within some groups of securities but not in others. This kind of structured factors allow a more nuanced analysis of determinants of the security returns, in particular, they allow to study clustering structures in security returns as well as their determinants. The clustering structure provides a natural way to group the securities and to interpret common factors and group-specific factors. We give conditions under which the common factor space and the group-specific factor spaces can be identified, and propose an effective procedure to estimate the unobservable structure in the factor space. Concretely, the procedure will determine the unknown number of groups, endogenously classify securities into groups, determine the number of common factors across all groups as well as the number of group-specific factors in each group, and estimate the common factors and the group-specific factors. The estimated factor structure will provides a more meaningful interpretation of the estimated factors in practical applications.
|Date of creation:||20 Jan 2012|
|Date of revision:|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Chen, Pu, 2010. "A Grouped Factor Model," MPRA Paper 28083, University Library of Munich, Germany, revised 11 Jan 2011.
- Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
- Jean Boivin & Serena Ng, 2003.
"Are More Data Always Better for Factor Analysis?,"
NBER Working Papers
9829, National Bureau of Economic Research, Inc.
- 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.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:36085. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)
If references are entirely missing, you can add them using this form.