Fishing with a Licence: An Empirical Search for Asset Pricing Factors

41 Pages Posted: 9 Nov 2008  

Soosung Hwang

Sungkyunkwan University - Department of Economics

Alexandre Rubesam

IESEG School of Management; French National Center for Scientific Research (CNRS) - Lille Economie & Management (LEM) UMR 9221

Date Written: November 7, 2008

Abstract

We study the question of which asset pricing factors should be included in linear factor asset pricing model. We develop a simple multivariate extension of a Bayesian variable selection procedure from the statistics literature to estimate posterior probabilities of asset pricing factors using many assets at once. Using a dataset of thousands of individual stocks in the US market, we calculate posterior probabilities of 12 factors which have been suggested in the literature. Our results indicate strong and robust evidence that a linear factor model should include the excess market return, the size and the liquidity factors, and only weak evidence that the idiosyncratic volatility and downside risk factors matter. We find that the famous Fama and French (1993, 1996) HML factor has high posterior probability only if portfolios formed on book-to-market ratio are used.

Keywords: linear factor model, asset pricing, Bayesian, variable selection

JEL Classification: G12

Suggested Citation

Hwang, Soosung and Rubesam, Alexandre, Fishing with a Licence: An Empirical Search for Asset Pricing Factors (November 7, 2008). Available at SSRN: https://ssrn.com/abstract=1297376 or http://dx.doi.org/10.2139/ssrn.1297376

Soosung Hwang

Sungkyunkwan University - Department of Economics ( email )

25-2 Sungkyunkwan-ro
Jongno-Gu
110-745 Seoul
+82 (0)2 760 0489 (Phone)
+82 (0)2 744 5717 (Fax)

Alexandre Rubesam (Contact Author)

IESEG School of Management ( email )

Socle de la Grande Arche
1 Parvis de la Defense
Puteaux, Paris 92800
France

French National Center for Scientific Research (CNRS) - Lille Economie & Management (LEM) UMR 9221 ( email )

Lille
France

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