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Semi-Strong Factors in Asset Returns

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  • Gregory Connor
  • Robert A Korajczyk

Abstract

We refine the approximate factor model of asset returns by distinguishing between strong factors, whose sum of squared factor betas grow at the same rate as the number of assets, and semi-strong factors, whose sum of squared factor betas grow to infinity, but at a slower rate. We develop a test statistic for strength of factors based on the cross-sectional mean-square of regression-estimated betas. We also describe an adjusted version of the test statistic to differentiate semi-strong factors from strong factors. We apply the methodology to daily equity returns to characterize some pre-specified factors as strong or semi-strong.

Suggested Citation

  • Gregory Connor & Robert A Korajczyk, 2024. "Semi-Strong Factors in Asset Returns," Journal of Financial Econometrics, Oxford University Press, vol. 22(1), pages 70-93.
    • Handle: RePEc:oup:jfinec:v:22:y:2024:i:1:p:70-93.
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbac028
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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

    Keywords

    semi-strong factors; factor model;

    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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