The Level, Slope and Curve Factor Model for Stocks

62 Pages Posted: 19 Nov 2014 Last revised: 21 Mar 2021

See all articles by Charles Clarke

Charles Clarke

University of Kentucky - Finance

Date Written: February 20, 2021


I develop a method to extract only the priced factors from stock returns. The first step estimates expected returns based on firm characteristics. The second step uses the estimated expected returns to form portfolios. The last step uses principal component analysis to extract factors from the portfolio returns. The procedure isolates and emphasizes the comovement across assets that is related to expected returns as opposed to firm characteristics. It produces three factors--level, slope and curve--which perform as well or better than other leading models. The methodology performs well in out-of-sample tests. The new factors have macroeconomic risk interpretations.

Keywords: Empirical Asset Pricing, Factor Models

Suggested Citation

Clarke, Charles, The Level, Slope and Curve Factor Model for Stocks (February 20, 2021). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: or

Charles Clarke (Contact Author)

University of Kentucky - Finance ( email )

Gatton School of Business and Economics
Department of Finance and Quantitative Methods
Lexington, KY 40506
United States
214-886-7675 (Phone)

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