Abstract

http://ssrn.com/abstract=959023
 
 

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A Test for the Number of Factors in an Approximate Factor Model


Robert A. Korajczyk


Northwestern University - Kellogg School of Management

Gregory Connor


London School of Economics & Political Science (LSE) - Department of Accounting and Finance

May 1993

Journal of Finance, Vol. 48, pp. 1263-1291, September 1993

Abstract:     
An important issue in applications of multifactor models of asset returns is the appropriate number of factors. Most extant tests for the number of factors are valid only for strict factor models, in which diversifiable returns are uncorrelated across assets. In this paper we develop a test statistic to determine the number of factors in an approximate factor model of asset returns, which does not require that diversifiable components of returns be uncorrelated across assets. We find evidence for one to six pervasive factors in the cross-section of New York Stock Exchange and American Stock Exchange stock returns.

Number of Pages in PDF File: 47

Keywords: Factor Models, Principal Components

JEL Classification: G1, G12, C3, C33

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Date posted: January 24, 2007 ; Last revised: August 21, 2009

Suggested Citation

Korajczyk, Robert A. and Connor, Gregory, A Test for the Number of Factors in an Approximate Factor Model (May 1993). Journal of Finance, Vol. 48, pp. 1263-1291, September 1993. Available at SSRN: http://ssrn.com/abstract=959023

Contact Information

Robert A. Korajczyk (Contact Author)
Northwestern University - Kellogg School of Management ( email )
2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8336 (Phone)
847-491-5719 (Fax)
Gregory Connor
London School of Economics & Political Science (LSE) - Department of Accounting and Finance ( email )
Houghton Street
London WC2A 2AE
United Kingdom
+44 702 955-6407 (Phone)
+44 702 955-7420 (Fax)
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