Firm Fundamentals and Realized Factor Betas

40 Pages Posted: 2 Aug 2017 Last revised: 15 Aug 2017

See all articles by Michael Halling

Michael Halling

Stockholm School of Economics & Swedish House of Finance

Markus Ibert

Board of Governors of the Federal Reserve System; Stockholm School of Economics - Swedish House of Finance

Martin Lenz

Union Investment; University of Mannheim - Department of Banking and Finance

Date Written: July 31, 2017

Abstract

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

Halling, Michael and Ibert, Markus and Lenz, Martin, Firm Fundamentals and Realized Factor Betas (July 31, 2017). Swedish House of Finance Research Paper No. 17-14. Available at SSRN: https://ssrn.com/abstract=3011256 or http://dx.doi.org/10.2139/ssrn.3011256

Michael Halling (Contact Author)

Stockholm School of Economics & Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Markus Ibert

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Stockholm School of Economics - Swedish House of Finance ( email )

111 60 Stockholm
Sweden

Martin Lenz

Union Investment ( email )

Wiesenhüttenplatz 25
Frankfurt am Main, 60329
Germany

University of Mannheim - Department of Banking and Finance ( email )

L5, 2
Mannheim, 68131
Germany

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