Firm Fundamentals and Realized Factor Betas
40 Pages Posted: 2 Aug 2017 Last revised: 15 Aug 2017
Date Written: July 31, 2017
Firm fundamentals, in particular firm size, help explain variation in factor loadings (betas) for the market, size and value factor. Surprisingly, however, they are dominated in terms of explanatory power by an unobserved time-invariant component. This leads to surprisingly stable factor loadings: stocks with high (low) factor loadings tend to remain as such for over a decade. Our models work best in explaining market betas (r-squares up to 64%) and worst in explaining value betas (r-squares up to 35%). These results are robust to different estimation techniques of factor betas and also hold up when we limit the sample to firms with statistically significant betas.
Keywords: Asset Pricing, Time-Varying Betas, Factor Models, Firm Fundamentals
JEL Classification: G11, G12
Suggested Citation: Suggested Citation