What Matters in a Characteristic?

Hugues Langlois
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Hugues Langlois: HEC Paris

No 1439, HEC Research Papers Series from HEC Paris

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 adjusted 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)
Pages: 62 pages
Date: 2021-05-20
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:1439

DOI: 10.2139/ssrn.3848587

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