Choosing Factors in a Multifactor Asset Pricing Model: A Bayesian Approach

Johan Ericsson () and Sune Karlsson ()
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Johan Ericsson: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden
Authors registered in the RePEc Author Service: Johan Parmler ()

No 524, Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: We use Bayesian techniques to select factors in a general multifactor asset pricing model. From a given set of 15 factors we evaluate all possible pricing models by the extent to which they describe the data as given by the posterior model probabilities. Interest rates, premiums, returns on broadbased portfolios and macroeconomic variables are included in the set of considered factors. Using different portfolios as the investment universe we find strong evidence that a general multifactor pricing model should include market excess return, size premium, value premium and the momentum factor. There is some evidence that yearly growth rate in industrial production and term spread also are important factors.

Keywords: asset pricing; factor models; Bayesian model selection (search for similar items in EconPapers)
JEL-codes: C11 C52 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-ets, nep-fin, nep-fmk and nep-rmg
Date: 2003-04-03, Revised 2004-02-12
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Persistent link: http://EconPapers.repec.org/RePEc:hhs:hastef:0524

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