Cross-Sectional Asset Pricing with Individual Stocks: Betas versus Characteristics
61 Pages Posted: 15 Jan 2015 Last revised: 14 Jan 2019
Date Written: November 2017
Abstract
We develop a methodology for bias-corrected return-premium estimation from cross-sectional regressions of individual stock returns on betas and firm characteristics. Over the period 1963-2014, there is some evidence of a negative premium on the size factor and positive beta premiums for the profitability and investment factors as well as the market factor (though not for the CAPM). There is no pricing evidence for the book-to-market and momentum factors with all characteristics included. Characteristics consistently explain a much larger proportion of variation in estimated expected returns than factor loadings, even with time-varying return premia
Keywords: Asset Pricing, Individual Stocks, Factor Loadings, Characteristics, Errors-in-Variables
JEL Classification: G10, G12
Suggested Citation: Suggested Citation