On Cross-Sectional Dispersions of Market Betas in Multifactor Models

42 Pages Posted: 29 Mar 2017 Last revised: 10 Dec 2019

See all articles by Seung C. Ahn

Seung C. Ahn

Arizona State University (ASU) - Economics Department

Alex R. Horenstein

University of Miami - School of Business Administration - Department of Economics

Date Written: December 9, 2019

Abstract

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

Ahn, Seung C. and Horenstein, Alex R., On Cross-Sectional Dispersions of Market Betas in Multifactor Models (December 9, 2019). Available at SSRN: https://ssrn.com/abstract=2942537 or http://dx.doi.org/10.2139/ssrn.2942537

Seung C. Ahn

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States

Alex R. Horenstein (Contact Author)

University of Miami - School of Business Administration - Department of Economics ( email )

P.O. Box 248126
Coral Gables, FL 33124-6550
United States

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