Semiparametric estimation of a characteristic-based factor model of common stock returns

Gregory Connor and Oliver Linton

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We introduce an alternative version of the Fama-French three-factor model of stock returns together with a new estimation methodology. We assume that the factor betas in the model are smooth nonlinear functions of observed security characteristics. We develop an estimation procedure that combines nonparametric kernel methods for constructing mimicking portfolios with parametric nonlinear regression to estimate factor returns and factor betas simultaneously. The methodology is applied to US common stocks and the empirical findings compared to those of Fama and French.

Keywords: characteristic-based factor model; arbitrage pricing theory; kernel estimation; nonparametric estimation. (search for similar items in EconPapers)
JEL-codes: C14 G12 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2006-09
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http://eprints.lse.ac.uk/4424/ Open access version. (application/pdf)

Related works:
Journal Article: Semiparametric estimation of a characteristic-based factor model of common stock returns (2007)
Working Paper: Semiparametric Estimation of aCharacteristic-based Factor Model ofCommon Stock Returns (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:4424

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