The seasonal stability of the factor structure of stock returns

Article Abstract:

This paper investigates the month-by-month stability of (a) daily returns and correlation coefficients of stock returns, (b) correlation and covariance matrices, (c) number of return-generating factors, and (d) the APT pricing relationship. The results show that there is a January effect and a small-firm effect in stock returns. Correlation matrices are more stable than covariance matrices, but both types of matrices are not stable across months and across the sample groups. The number of return-generating factors is rather stable most of the time and for most of the sample groups, but there is some significant instability that is related to the average correlation coefficients among stocks. The APT pricing relationship does not seem to be supported by the two-stage process using the maximum-likelihood factor analysis. (Reprinted by permission of the publisher.)

Finance, Stocks, Stock-exchange, Stock exchanges

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Estimating the volatility of discrete stock prices

Article Abstract:

This paper introduces an estimator of stock price volatility that eliminates, at least asymptotically, the biases that are caused by the discreteness of observed stock prices. Assuming that the observed stock prices are continuously monitored, an estimator is constructed using the notion of how quickly the price changes rather than how much the price changes. It is shown that this estimator has desirable asymptotic properties, including consistency and asymptotic normality. Also, through a simulation study, the authors show that it outperforms natural estimators for the low- and middle-priced stocks. Furthermore, the simulation study demonstrates that the proposed estimator is robust to certain misspecifications in measuring the time between price changes. (Reprinted by permission of the publisher.)

Research, Stock price forecasting

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On testing the Arbitrage Pricing Theory: inter-battery factor analysis

Article Abstract:

The Arbitrage Pricing Theory (APT), a model for explaining the relationship between return and risk, is tested by estimating the factor loadings that are consistent between two industry groups of securities. Inter-battery factor analysis is used, which enables factor loadings to be estimated by constraining the factors to be the same between two groups of securities. Results indicate that there are five or six inter-group common factors that generate daily returns for two industry groups of securities; these inter-group common factors do not seem to depend on the size of the groups. Based on cross-sectional tests on the risk premia, it is concluded that the APT should not be rejected.

Models, Comparative analysis, Criticism and interpretation, Investment analysis, Securities analysis, Capital assets pricing model, Capital asset pricing model, Roll, R., Ross, S.A.

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