Market Beta is not dead: An approach from Random Matrix Theory

L. Molero-González, Juan Trinidad-Segovia (), M.A. Sánchez-Granero and A. García-Medina

Finance Research Letters, 2023, vol. 55, issue PA

Abstract: In the 1980s, the first doubts about the validity of the Sharpe Single Index Model to explain the cross-sectional expected returns of financial assets appeared. Since then, the financial literature has proposed a wide variety of new factors, while many empirical studies have tried to determine their plausibility. In this paper, we present a new approach from the Random Matrix Theory to determine if the Arbitrage Pricing Theory models are better than the Sharpe Model to explain the cross-sectional expected returns. We will show that, except for periods of high volatility, just one factor is significant in the sample. We will also prove that this factor is the Market one.

Keywords: APT; RMT; CAPM; Beta (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:55:y:2023:i:pa:s1544612323001897

DOI: 10.1016/j.frl.2023.103816

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