The Level, Slope and Curve Factor Model for Stocks

56 Pages Posted: 19 Nov 2014 Last revised: 5 Dec 2016

Charles Clarke

University of Kentucky - Finance

Date Written: November 16, 2016


I develop a method to extract only the priced factors from stock returns. First, I use multiple regression on anomaly characteristics to predict expected returns. Next, I form portfolios of stocks sorted by their expected returns. Then, I extract statistical factors from these sorts using principal components. The procedure isolates and emphasizes the comovement across assets that is related to expected returns as opposed to firm characteristics. The procedure produces level, slope and curve factors for stock returns. The factors perform better than the Fama and French (1993, 2014) three and five factor models and comparably to the four factor models of Carhart (1997), Novy-Marx (2013) and Hou, Xue, and Zhang (2012). Horse races show that other factors add little to the Level, Slope and Curve factors. The Level, Slope and Curve factors have macroeconomic interpretations. The factors capture strong variation in consumption growth across the sorted portfolios, and when embedded in an ICAPM, proxy for innovations to dividend yield, credit spread and stock volatility.

Keywords: Empirical Asset Pricing, Factor Models

Suggested Citation

Clarke, Charles, The Level, Slope and Curve Factor Model for Stocks (November 16, 2016). 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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