What matters in a characteristic?

Hugues Langlois

Journal of Financial Economics, 2023, vol. 149, issue 1, 52-72

Abstract: We investigate how different components in firm characteristics affect expected returns and comovements in international stock markets. We decompose characteristics into country, industry, and country- and industry-adjusted (i.e., orthogonal) components. Then, we use these components to capture time-series and cross-sectional variations in stock-level alphas and factor exposures. Decomposing characteristics is crucial to explain jointly expected returns and comovements: (i) adjusted (country) components are the most important determinant of alphas (comovements), (ii) component-based models outperform benchmark models, and (iii) alphas are statistically significant. However, alphas have been trending down over time, and alpha-chasing strategies are not profitable once we account for estimation risk and trading costs.

Keywords: IPCA; Characteristics; Country; Industry; Alpha; Systematic risk (search for similar items in EconPapers)
JEL-codes: G12 G15 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:149:y:2023:i:1:p:52-72

DOI: 10.1016/j.jfineco.2023.04.010

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