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Semiparametric estimation of a characteristic-based factor model of common stock returns

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  • Connor, Gregory
  • Linton, Oliver

Abstract

We introduce an alternative version of the Fama-French three-factor model of stock returns together with a new estimation methodology. We assume that the factor betas in the model are smooth nonlinear functions of observed security characteristics. We develop an estimation procedure that combines nonparametric kernel methods for constructing mimicking portfolios with parametric nonlinear regression to estimate factor returns and factor betas simultaneously. The methodology is applied to US common stocks and the empirical findings compared to those of Fama and French.

Suggested Citation

  • Connor, Gregory & Linton, Oliver, 2006. "Semiparametric estimation of a characteristic-based factor model of common stock returns," LSE Research Online Documents on Economics 4424, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:4424
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    File URL: http://eprints.lse.ac.uk/4424/
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    References listed on IDEAS

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    More about this item

    Keywords

    characteristic-based factor model; arbitrage pricing theory; kernel estimation; nonparametric estimation.;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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