Beta Matrix and Common Factors in Stock Returns

46 Pages Posted: 12 Mar 2010 Last revised: 30 Mar 2017

See all articles by Seung C. Ahn

Seung C. Ahn

Arizona State University (ASU) - Economics Department

Alex R. Horenstein

University of Miami - School of Business Administration - Department of Economics

Na Wang

Hofstra University - Frank G. Zarb School of Business

Date Written: January 8, 2017

Abstract

We consider the estimation methods for the rank of a beta matrix corresponding to a multifactor model and study which method would be appropriate for data with a large number of assets. Our simulation results indicate that a restricted version of Cragg and Donald’s (1997) Bayesian Information Criterion estimator is quite reliable for such data. We use this estimator to analyze some selected asset pricing models with U.S. stock returns. Our results indicate that the beta matrix from many models fails to have full column rank, suggesting that risk premiums in these models are under-identified.

Keywords: factor models, beta matrix, rank, risk factors, and asset prices

JEL Classification: C01, C23, C31, G12

Suggested Citation

Ahn, Seung C. and Horenstein, Alex R. and Wang, Na, Beta Matrix and Common Factors in Stock Returns (January 8, 2017). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1567933 or http://dx.doi.org/10.2139/ssrn.1567933

Seung C. Ahn

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States

Alex R. Horenstein

University of Miami - School of Business Administration - Department of Economics ( email )

P.O. Box 248126
Coral Gables, FL 33124-6550
United States

Na Wang (Contact Author)

Hofstra University - Frank G. Zarb School of Business ( email )

134 Hofstra University
Hempstead, NY 11549
United States

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