The dynamics of factor loadings in the cross-section of returns

Riccardo Borghi (riccardo.borghi.1@cass.city.ac.uk), Eric Hillebrand (ehillebrand@creates.au.dk), Jakob Mikkelsen (jgm@nationalbanken.dk) and Giovanni Urga
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Riccardo Borghi: Cass Business School
Jakob Mikkelsen: Danmarks Nationalbank

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: In this paper, we propose a two-level factor model with time-varying loadings to investigate the dynamics of factor betas in the cross-section of returns of a large portfolio of 1815 firms from 54 countries over the period 2006-2016. The model contains a global observed financial factor and unobserved global and regional factors consistently estimated via principal component. When unexpected events happen globally, loadings on global factors increase. The dynamics of the global factor loadings is related to the profile of the firm. Loadings persistence is decreasing in firm size and expected returns are increasing in the variance of the loading.

Keywords: High-dimensional factor models; financial; global and regional risk factors; time-varying loadings; systematic risk (search for similar items in EconPapers)
JEL-codes: C32 C38 C55 G01 G15 (search for similar items in EconPapers)
Pages: 50
Date: 2018-12-08
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