Sources of Systematic Risk
37 Pages Posted: 17 Mar 2008 Last revised: 14 Aug 2010
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: Suggested Citation
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