Cross-Section Without Factors: Correlation Risk, Strings and Asset Prices

55 Pages Posted: 10 Sep 2020 Last revised: 14 Jan 2021

See all articles by Walter Distaso

Walter Distaso

Imperial College Business School

Antonio Mele

University of Lugano; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Grigory Vilkov

Frankfurt School of Finance & Management

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 2020


Many asset pricing theories treat the cross-section of expected returns, volatility and correlations as quantities driven by common factors. We formulate and estimate a model without such factors, but with a continuum of securities that have returns driven by a string. Our arbitrage restrictions require that any asset premium links to the granular exposure of the asset returns to shocks in all other asset returns: an average correlation premium. The model predictions uncover fresh properties of big stocks. Big stocks display a high degree of market connectivity in bad times, but also work as correlation hedges: they contribute to a negative fraction of the average correlation premium, and portfolios that are more exposed to them command a lower premium. The string model performs at least as well as many existing linear factor models.

Keywords: correlation premium, premium for correlation risk, cross-section of returns, big stocks, arbitrage pricing, string models, implied correlation.

JEL Classification: G11, G12, G13, G17

Suggested Citation

Distaso, Walter and Mele, Antonio and Vilkov, Grigory, Cross-Section Without Factors: Correlation Risk, Strings and Asset Prices (August 1, 2020). Swiss Finance Institute Research Paper No. 20-119, Available at SSRN: or

Walter Distaso (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Antonio Mele

University of Lugano ( email )

Via Buffi 13
Lugano, 6900


Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

Grigory Vilkov

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322


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