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Semiparametric Estimation of a Characteristic-Based Factor Model of Stock Returns

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  • Oliver Linton
  • Gregory Connor

Abstract

This paper develops a new estimation procedure for characteristic-based factor models of stock returns. It describes a factor model in which the factor betas are smooth nonlinear functions of observed security characteristics. It develops an estimation procedure that combines nonparametric kernel methods for constructing mimicking portfolios with parametric nonlinear regression to estimate factor returns and factor betas. Factor models are estimated for UK and US common stocks using book-to-price ratio, market capitalizations, and dividend yield.

Suggested Citation

  • Oliver Linton & Gregory Connor, 2000. "Semiparametric Estimation of a Characteristic-Based Factor Model of Stock Returns," FMG Discussion Papers dp346, Financial Markets Group.
    • Handle: RePEc:fmg:fmgdps:dp346
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    File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmgdps/dp346.pdf
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    References listed on IDEAS

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    2. Fengler, Matthias R. & Härdle, Wolfgang Karl & Mammen, Enno, 2005. "A dynamic semiparametric factor model for implied volatility string dynamics," SFB 649 Discussion Papers 2005-020, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.

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