Semiparametric Estimation of a Characteristic-Based Factor Model of Common Stock Returns

40 Pages Posted: 21 Jul 2008

See all articles by Gregory Connor

Gregory Connor

London School of Economics & Political Science (LSE) - Department of Accounting and Finance

Oliver B. Linton

University of Cambridge

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

Connor, Gregory and Linton, Oliver B., Semiparametric Estimation of a Characteristic-Based Factor Model of Common Stock Returns (September 2006). LSE STICERD Research Paper No. EM506, Available at SSRN: https://ssrn.com/abstract=1163556

Gregory Connor (Contact Author)

London School of Economics & Political Science (LSE) - Department of Accounting and Finance ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 702 955-6407 (Phone)
+44 702 955-7420 (Fax)

Oliver B. Linton

University of Cambridge ( email )

Faculty of Economics
Cambridge, CB3 9DD
United Kingdom

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