Semiparametric Estimation of a Characteristic-Based Factor Model of Common Stock Returns
40 Pages Posted: 21 Jul 2008
Date Written: September 2006
Abstract
We introduce an alternative version of the Fama-French three-factor model of stock returns together with a new estimation methodology. We assume that the factor betas in the model are smooth nonlinear functions of observed security characteristics. We develop an estimation procedure that combines nonparametric kernel methods for constructing mimicking portfolios with parametric nonlinear regression to estimate factor returns and factor betas simultaneously. The methodology is applied to US common stocks and the empirical findings compared to those of Fama and French.
JEL Classification: G12, C14
Suggested Citation: Suggested Citation
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