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The Risk and Return from Factors

Published online by Cambridge University Press:  06 April 2009

Louis K. C. Chan ,
Jason Karceski  and
Josef Lakonishok
Louis K. C. Chan
Affiliation:
Department of Finance, College of Commerce and Business Administration, University of Illinois at Urbana-Champaign, Champaign, IL 61820
Jason Karceski
Affiliation:
Department of Finance, Insurance and Real Estate, School of Business Administration, University of Florida, Gainesville, FL 32611.
Josef Lakonishok
Affiliation:
Department of Finance, College of Commerce and Business Administration, University of Illinois at Urbana-Champaign, Champaign, IL 61820
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Abstract

The ability to identify which factors best capture systematic return covariation is central to applications of multifactor pricing models. This paper uses a common data set to evaluate the performance of various proposed factors in capturing return comovements. Factors associated with the market, size, past return, book-to-market, and dividend yield help explain return comovement on an out-of-sample basis (although they are not necessarily associated with large premiums in average returns). Except for the default premium and the term premium, macroeconomic factors perform poorly. We document regularities in the behavior of the more important factors, and confirm their influence in the Japanese and U.K. markets as well.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 33 , Issue 2 , June 1998 , pp. 159 - 188
Copyright
Copyright © School of Business Administration, University of Washington 1998

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