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

Phoebe Koundouri (), Nikolaos Kourogenis (), Nikitas Pittis () and Panagiotis Samartzis
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Nikitas Pittis: University of Piraeus, Greece

No 1507, DEOS Working Papers from Athens University of Economics and Business

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'.

Keywords: empirical regularities; stock returns; single factor model; autoregressive beta; statistical explanation. (search for similar items in EconPapers)
JEL-codes: C18 G10 C22 G11 G12 (search for similar items in EconPapers)
Date: 2015-02-05
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