Time Series Variation in the Factor Zoo

64 Pages Posted: 21 Jan 2022 Last revised: 19 Apr 2022

See all articles by Hendrik Bessembinder

Hendrik Bessembinder

W.P. Carey School of Business

Aaron Burt

University of Oklahoma - Division of Finance

Christopher M. Hrdlicka

University of Washington - Michael G. Foster School of Business

Date Written: December 22, 2021

Abstract

Should we be surprised at the number of “animals” in the “Factor Zoo"? The ability of the CAPM as well as workhorse three- to six-factor models to explain the cross-section of returns varies substantially over time, providing scope for a broad set of factors. We study 205 previously-identified factors, documenting time variation in their significance, prior to, during, and after the periods studied by the original authors. The number of statistically significant factors, as well as the number of principal components obtained from them, varies with the cross-sectional dispersion in individual stock CAPM alphas. The number of significant factors is strongly related to the number of publicly-listed firms, and is also related to institutional ownership, recession indicators, interest rates, and measures of diversity in firm characteristics. On balance, our results suggest that the large number of factors with significant explanatory power reflects the complexity of the economic environment, including changes in investor composition, the types of firms listed, and competitive conditions.

Keywords: Asset Pricing, Factors, Complexity, Time series variation, Diversity

JEL Classification: G10, G11, G12

Suggested Citation

Bessembinder, Hendrik (Hank) and Burt, Aaron Paul and Hrdlicka, Christopher M., Time Series Variation in the Factor Zoo (December 22, 2021). Available at SSRN: https://ssrn.com/abstract=3992041 or http://dx.doi.org/10.2139/ssrn.3992041

Hendrik (Hank) Bessembinder (Contact Author)

W.P. Carey School of Business ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

HOME PAGE: http://isearch.asu.edu/profile/2717225

Aaron Paul Burt

University of Oklahoma - Division of Finance ( email )

Norman, OK 73019
United States

HOME PAGE: http://sites.google.com/sites/aaronburt

Christopher M. Hrdlicka

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195
United States
206.616.0332 (Phone)
206.542.7472 (Fax)

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