Multifactor Market Indexes

44 Pages Posted: 15 Dec 2017 Last revised: 11 Apr 2019

See all articles by Wei Liu

Wei Liu

Texas A&M University - Department of Finance

James W. Kolari

Texas A&M University - Department of Finance

Date Written: April 10, 2019

Abstract

A growing list of proposed factors is causing factor and model selection problems in asset pricing research and practice. This paper mitigates these problems by combining the CRSP market index with multiple factors to create a single multifactor market index. Empirical tests of multifactor market indexes using a variety of different test asset portfolios indicate that: (1) Sharpe ratios substantially increase and GRS test statistics decrease as multifactors are incrementally added to the CRSP index; and (2) the resultant multifactor market indexes are significantly priced in cross-sectional tests with t-values exceeding 3.0 in most cases. Further analyses create a new aggregate industry index which is priced among industry portfolios. When multifactors and industry portfolios are combined with the CRSP index, this more general multifactor market index boosts cross-sectional t-values and eliminates mispricing error. Lastly, momentum continues to be priced even when included in multifactor market indexes and therefore is a possible strong factor. Implications to developing more parsimonious asset pricing models as well as more efficient market indexes for investment purposes are discussed.

Keywords: efficient portfolios, market, beta, market index, multifactors

JEL Classification: G11, G12

Suggested Citation

Liu, Wei and Kolari, James W., Multifactor Market Indexes (April 10, 2019). Mays Business School Research Paper No. 3086832. Available at SSRN: https://ssrn.com/abstract=3086832 or http://dx.doi.org/10.2139/ssrn.3086832

Wei Liu

Texas A&M University - Department of Finance ( email )

430 Wehner
College Station, TX 77843-4218
United States

James W. Kolari (Contact Author)

Texas A&M University - Department of Finance ( email )

MS-4218
Department of Finance
College Station, TX TX 77843-4218
United States
979-845-4803 (Phone)
979-845-3884 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
61
Abstract Views
359
rank
349,112
PlumX Metrics