IDEAS home Printed from https://ideas.repec.org/p/sef/csefwp/685.html
   My bibliography  Save this paper

Instability of Factor Strength in Asset Returns

Author

Abstract

We study the problem of detecting structural instability of factor strength in asset pricing models for financial returns with observable factors. We allow for strong and weaker factors, in which the sum of squared betas grows at a rate equal to and slower than the number of test assets, respectively: this growth rate determines the strength of the corresponding factor. We propose LM and Wald statistics for the null hypothesis of stability and derive their asymptotic distribution when the break fraction is known, as well as when it is unknown and has to be estimated. We corroborate our theoretical results through a comprehensive series of Monte Carlo experiments. An extensive empirical analysis uncovers the dynamics of instability of factor strength in financial returns from equity portfolios.

Suggested Citation

  • Daniele Massacci, 2023. "Instability of Factor Strength in Asset Returns," CSEF Working Papers 685, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    • Handle: RePEc:sef:csefwp:685
    as

    Download full text from publisher

    File URL: https://www.csef.it/WP/wp685.pdf
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    Factor strength; structural break; hypothesis testing; stock portfolios.;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sef:csefwp:685. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Dr. Maria Carannante (email available below). General contact details of provider: https://edirc.repec.org/data/cssalit.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.