How to explain the cross-section of equity returns through Common Principal Components
Ignacio Cascos Fernández,
Aurea Grané Chávez and
José Manuel Cueto
DES - Working Papers. Statistics and Econometrics. WS from Universidad Carlos III de Madrid. Departamento de Estadística
In this paper we propose a procedure to obtain and test multifactor models based on statistical and financial factors. In order to select the factors included in the model,as well as the construction of the portfolios, we use a multivariate technique called Common Principal Components. A block-bootstrap methodology is developed to assess the validity of the model and the significance of the parameters involved. Data come from Reuters, correspond to nearly 1250 EU companies, and span from October 2009 to October 2019. We also compare our bootstrap-based inferential results with those obtained via classical testing proposals. Methods under assessment are time-series regression and cross-sectional regression. The main findings indicate that the multifactor model proposed improves the Capital Asset Pricing Model with regard to the adjusted-R2 in the time-series regressions. Cross-section regression results reveal that Market and a factor related to Momentum and mean of stocks' returns have positive risk premia for the analysed period. Finally, we also observe that tests based onblock-bootstrap statistics are more conservative with the none than classical procedures.
Keywords: Time; Series; Factor; Models; Cross-Sectional; Regression; Common; Principal; Component; Analysis; Bootstrap; Asset; Pricing (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cwa and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:cte:wsrepe:32258
Access Statistics for this paper
More papers in DES - Working Papers. Statistics and Econometrics. WS from Universidad Carlos III de Madrid. Departamento de Estadística
Bibliographic data for series maintained by Ana Poveda ().