Return Predictability from Firm-Specific Variables and the Beta Pricing Theory
This paper shows that factor-mimicking portfolios can always be formed to perfectly “explain stock return predictability by firm-specific variables and, therefore, in order to avoid the pitfall in forming mimicking portfolios, it is imperative that factors be constructed without using any information about predictive power of the firm-specific variables. We employ two sets of principal component factors, one constructed from individual stock returns and the other from size and book-to-market sorted portfolio returns to provide evidence that, while the size and book-to-market effects can be explained by the betas of some systematic factors, these factors do not represent the most important factors in the individual stock returns. This finding has implications on using models with factors constructed from size and book-to-market as benchmarks in empirical asset pricing studies.
CHU ZHANG
Department of Finance,The Hong Kong University of Science and Technology,Clear Water Bay,Kowloon,Hong Kong
国际会议
成都
英文
2007-07-09（万方平台首次上网日期，不代表论文的发表时间）