IDEAS home Printed from https://ideas.repec.org/p/chf/rpseri/rp20119.html
   My bibliography  Save this paper

Cross-Section Without Factors: Correlation Risk, Strings and Asset Prices

Author

Listed:
  • Walter Distaso

    (Imperial College Business School)

  • Antonio Mele

    (University of Lugano; Swiss Finance Institute; Centre for Economic Policy Research (CEPR))

  • Grigory Vilkov

    (Frankfurt School of Finance & Management)

Abstract

Many asset pricing theories treat the cross-section of expected returns, volatility and correlations as quantities driven by common factors. We formulate and estimate a model without such factors, but with a continuum of securities that have returns driven by a string. Our arbitrage restrictions require that any asset premium links to the granular exposure of the asset returns to shocks in all other asset returns: an average correlation premium. The model predictions uncover fresh properties of big stocks. Big stocks display a high degree of market connectivity in bad times, but also work as correlation hedges: they contribute to a negative fraction of the average correlation premium, and portfolios that are more exposed to them command a lower premium. The string model performs at least as well as many existing linear factor models.

Suggested Citation

  • Walter Distaso & Antonio Mele & Grigory Vilkov, 2020. "Cross-Section Without Factors: Correlation Risk, Strings and Asset Prices," Swiss Finance Institute Research Paper Series 20-119, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp20119
    as

    Download full text from publisher

    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3665181
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    correlation premium; premium for correlation risk; cross-section of returns; big stocks; arbitrage pricing; string models; implied correlation;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:chf:rpseri:rp20119. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ridima Mittal (email available below). General contact details of provider: https://edirc.repec.org/data/fameech.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.