New Factor Models and the APT

54 Pages Posted: 1 Oct 2018

See all articles by Ilan Cooper

Ilan Cooper

BI Norwegian Business School

Liang Ma

University of South Carolina - Darla Moore School of Business

Paulo F. Maio

Hanken School of Economics - Department of Finance and Statistics

Dennis Philip

Durham University Business School

Date Written: August 30, 2018

Abstract

We seek to describe the cross-section of stock returns. We follow the APT literature and estimate the common factor structure among a cross-section containing 420 portfolios (associated with 42 anomalies). Our statistical model contains nine common factors and (by construction) prices well both the original returns and an efficient combination of these returns. This model clearly outperforms the empirical workhorses in the literature when it comes to pricing risk premia. Augmenting the empirical models with new factor-mimicking portfolios, based on APT principles (strong time-series correlation with testing portfolios), significantly improves their performance (with gains in R2 above 30 percentage points).

Keywords: asset pricing; linear multifactor models; APT; equity risk factors; stock market anomalies; cross-section of stock returns; principal components

JEL Classification: G10, G12

Suggested Citation

Cooper, Ilan and Ma, Liang and Maio, Paulo F. and Philip, Dennis, New Factor Models and the APT (August 30, 2018). Available at SSRN: https://ssrn.com/abstract=3257286

Ilan Cooper (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Liang Ma

University of South Carolina - Darla Moore School of Business ( email )

Paulo F. Maio

Hanken School of Economics - Department of Finance and Statistics ( email )

FI-00101 Helsinki
Finland

HOME PAGE: http://sites.google.com/site/paulofmaio/home

Dennis Philip

Durham University Business School ( email )

Mill Hill Lane
Mill Hill Lane
Durham, DH13LB
United Kingdom

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