Cross-Sectional Asset Pricing with Individual Stocks: Betas versus Characteristics

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