Sources of Systematic Risk

37 Pages Posted: 17 Mar 2008 Last revised: 14 Aug 2010

See all articles by Igor Makarov

Igor Makarov

London School of Economics & Political Science (LSE)

Dimitris Papanikolaou

Northwestern University - Kellogg School of Management - Department of Finance; National Bureau of Economic Research (NBER)

Abstract

Using the restrictions implied by the heteroskedasticity of stock returns, we identify four factors in the U.S. industry returns. The first correlates highly with the market portfolio; the second is a portfolio of stocks that produce investment goods minus stocks that produce consumption goods; the third differentiates between cyclical and noncyclical stocks. The fourth, a portfolio of industries that produce input goods minus the rest of the market, is a robust predictor of excess returns on the market portfolio and bond returns. The extracted factors are shown to contain significant information about future macroeconomic and financial variables.

Keywords: Factor analysis, identification, heteroscedasticity

JEL Classification: G12, G10

Suggested Citation

Makarov, Igor and Papanikolaou, Dimitris, Sources of Systematic Risk. Available at SSRN: https://ssrn.com/abstract=968229 or http://dx.doi.org/10.2139/ssrn.968229

Igor Makarov

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Dimitris Papanikolaou (Contact Author)

Northwestern University - Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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