Factor Models for Binary Financial Data

45 Pages Posted: 30 Jan 2018

See all articles by Marcos Fabricio Perez

Marcos Fabricio Perez

Wilfrid Laurier University - School of Business & Economics

Andriy Shkilko

Wilfrid Laurier University - Lazaridis School of Business and Economics

Konstantin Sokolov

University of Memphis - Fogelman College of Business and Economics

Date Written: July 15, 2015

Abstract

Researchers are often interested in modeling binary decisions made by firms (e.g., the yes or no decisions to split the shares, initiate a dividend, or acquire another firm) as functions of economy-wide variables (common factors). Although factor models for continuous dependent variables are used widely, the toolkit of a financial researcher does not contain a generally accepted methodology that allows estimating factor models for binary dependent variables. In this paper, we study such a methodology. Using simulations, we identify data characteristics that allow for reliable estimates of factor parameters and conclude that the methodology is appropriate for the panel datasets of the type often used in finance. As an illustration, we use the methodology to address a currently debated issue of common factors in firms’ decisions to split their shares.

Keywords: Factor Analysis, Discrete Data; Principal Components; Stock Splits; Catering; Commonality; Common Factors

Suggested Citation

Perez, Marcos Fabricio and Shkilko, Andriy and Sokolov, Konstantin, Factor Models for Binary Financial Data (July 15, 2015). Available at SSRN: https://ssrn.com/abstract=3106501 or http://dx.doi.org/10.2139/ssrn.3106501

Marcos Fabricio Perez (Contact Author)

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
CANADA
519-884 0710 (Phone)
519-884 0201 (Fax)

HOME PAGE: http://www.public.asu.edu/~mfperez/

Andriy Shkilko

Wilfrid Laurier University - Lazaridis School of Business and Economics ( email )

LH 4050
75 University Ave. W.
Waterloo, Ontario N2L3C5
Canada
519.884.0710 ext. 2462 (Phone)
519.884.0201 (Fax)

Konstantin Sokolov

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States

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