Semiparametric estimation of a characteristic-based factor model of common stock returns

Connor, Gregory and Linton, Oliver (2006) Semiparametric estimation of a characteristic-based factor model of common stock returns. EM/2006/506. Suntory and Toyota International Centres for Economics and Related Disciplines, London School of Economics and Political Science, London, UK.

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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.

Item Type:	Monograph (Discussion Paper)
Official URL:	http://sticerd.lse.ac.uk
Additional Information:	© 2006 the authors
Uncontrolled Keywords:	characteristic-based factor model, arbitrage pricing theory, kernel estimation, nonparametric estimation.
Library of Congress subject classification:	H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System:	G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods: General > C14 - Semiparametric and Nonparametric Methods
Sets:	Research centres and groups > Financial Markets Group (FMG) Collections > Economists Online Departments > Economics Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)
Rights:	http://www.lse.ac.uk/library/collections/folder/LSERO.aspx
Identification Number:	EM/2006/506
Date Deposited:	21 Apr 2008 11:29
URL:	http://eprints.lse.ac.uk/4424/

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