What Matters in a Characteristic?

62 Pages Posted: 20 May 2021 Last revised: 3 Mar 2023

Date Written: March 3, 2023


We investigate how different components in firm characteristics affect expected returns and comovements in international stock markets. We decompose characteristics into country, industry, and adjusted components. Then, we use these components to capture time-series and cross-sectional variations in stock-level alphas and factor exposures. Decomposing characteristics is crucial to explain jointly expected returns and comovements: (i) adjusted (country) components are the most important determinant of alphas (comovements), (ii) component-based models outperform benchmark models, and (iii) alphas are statistically significant. However, alphas have been trending down over time, and alpha-chasing strategies are not profitable once we account for estimation risk and trading costs.

Keywords: IPCA, characteristics, country, industry, alpha, systematic risk.

JEL Classification: G12, G15.

Suggested Citation

Langlois, Hugues, What Matters in a Characteristic? (March 3, 2023). HEC Paris Research Paper No FIN-2021-1439, Available at SSRN: https://ssrn.com/abstract=3848587 or http://dx.doi.org/10.2139/ssrn.3848587

Hugues Langlois (Contact Author)

HEC Paris - Finance Department ( email )


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