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What matters in a characteristic?

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  • Langlois, Hugues

Abstract

We investigate how different components in firm characteristics affect expected returns and comovements in international stock markets. We decompose characteristics into country, industry, and country- and industry-adjusted (i.e., orthogonal) components. Then, we use these components to capture time-series and cross-sectional variations in stock-level alphas and factor exposures. Decomposing characteristics is crucial to explain jointly expected returns and comovements: (i) adjusted (country) components are the most important determinant of alphas (comovements), (ii) component-based models outperform benchmark models, and (iii) alphas are statistically significant. However, alphas have been trending down over time, and alpha-chasing strategies are not profitable once we account for estimation risk and trading costs.

Suggested Citation

  • Langlois, Hugues, 2023. "What matters in a characteristic?," Journal of Financial Economics, Elsevier, vol. 149(1), pages 52-72.
    • Handle: RePEc:eee:jfinec:v:149:y:2023:i:1:p:52-72
    DOI: 10.1016/j.jfineco.2023.04.010
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    Cited by:

    1. Shi, Huai-Long & Chen, Huayi, 2024. "Understanding co-movements based on heterogeneous information associations," International Review of Financial Analysis, Elsevier, vol. 94(C).

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    More about this item

    Keywords

    IPCA; Characteristics; Country; Industry; Alpha; Systematic risk;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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