On Cross-Sectional Dispersions of Market Betas in Multifactor Models
42 Pages Posted: 29 Mar 2017 Last revised: 10 Dec 2019
Date Written: December 9, 2019
This paper provides a new explanation for the empirical failure of the Market factor to explain the cross-sectional dispersion of expected stock returns. Specifically, we find the conditions under which all Market betas become unitary when the CAPM is augmented with the common factors in the space of excess returns. Based on this finding we propose a simple method that can identify the relevant statistical factors for asset pricing and develop a benchmark model with five statistical factors. Using the model, we examine if the five-factor model of Fama and French (2015) captures all of the factors that are relevant for asset pricing.
Keywords: Excess returns, market portfolio, well-diversified portfolio, principal components
JEL Classification: C58, G11, G12
Suggested Citation: Suggested Citation