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Sources of systematic risk

Subject

Finance

Publishing details

IFA Working Paper

Authors / Editors

Makarov I;Papanikolaou D

Publication Year

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

Series

IFA Working Paper

Available on ECCH

No


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