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Semi-strong factors in asset returns

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  • Gregory Connor

    (Department of Economics, Finance and Accounting, Maynooth University.)

  • Robert A. Korajczyk

    (Financial Institutions and Markets Research Center, Kellogg School of Management, Northwestern Universtiy)

Abstract

This paper re nes the approximate factor model of asset returns by dividing sys- tematic factors into a) natural rate factors, whose sum of squared factor betas grow at the same rate as the number of assets, and b) semi-strong factors, whose sum of squared factor betas grow, but at a slower rate. We describe a methodology to estimate the cross-sectional mean and mean-square of semi-strong factor betas, and to di¤eren- tiate them from natural rate factors. We apply the methodology to US equity returns using daily changes in exchange rates and commodity prices as semi-strong factors. We nd that oil and gold price changes are signi cant factors while foreign exchange rate changes are only signi cant in more recent subperiods.

Suggested Citation

  • Gregory Connor & Robert A. Korajczyk, 2019. "Semi-strong factors in asset returns," Economics Department Working Paper Series n294-19.pdf, Department of Economics, National University of Ireland - Maynooth.
    • Handle: RePEc:may:mayecw:n294-19.pdf
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    Cited by:

    1. M. Hashem Pesaran & Ron P. Smith, 2021. "Factor Strengths, Pricing Errors, and Estimation of Risk Premia," CESifo Working Paper Series 8947, CESifo.

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    More about this item

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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