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Article

How to Explain the Cross-Section of Equity Returns through Common Principal Components

Department of Statistics, Universidad Carlos III de Madrid, 28903 Getafe, Spain
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Authors to whom correspondence should be addressed.
Academic Editors: José María Sarabia and Montserrat Guillén
Mathematics 2021, 9(9), 1011; https://doi.org/10.3390/math9091011
Received: 26 March 2021 / Revised: 23 April 2021 / Accepted: 27 April 2021 / Published: 29 April 2021
In this paper, we propose a procedure to obtain and test multifactor models based on statistical and financial factors. A major issue in the factor literature is to select the factors included in the model, as well as the construction of the portfolios. We deal with this matter using a dimensionality reduction technique designed to work with several groups of data called Common Principal Components. A block-bootstrap methodology is developed to assess the validity of the model and the significance of the parameters involved. Data come from Reuters, correspond to nearly 1250 EU companies, and span from October 2009 to October 2019. We also compare our bootstrap-based inferential results with those obtained via classical testing proposals. Methods under assessment are time-series regression and cross-sectional regression. The main findings indicate that the multifactor model proposed improves the Capital Asset Pricing Model with regard to the adjusted-R2 in the time-series regressions. Cross-section regression results reveal that Market and a factor related to Momentum and mean of stocks’ returns have positive risk premia for the analyzed period. Finally, we also observe that tests based on block-bootstrap statistics are more conservative with the null than classical procedures. View Full-Text
Keywords: asset pricing; bootstrap; common principal component analysis; cross-sectional regression; factor models; time series asset pricing; bootstrap; common principal component analysis; cross-sectional regression; factor models; time series
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MDPI and ACS Style

Cueto, J.M.; Grané, A.; Cascos, I. How to Explain the Cross-Section of Equity Returns through Common Principal Components. Mathematics 2021, 9, 1011. https://doi.org/10.3390/math9091011

AMA Style

Cueto JM, Grané A, Cascos I. How to Explain the Cross-Section of Equity Returns through Common Principal Components. Mathematics. 2021; 9(9):1011. https://doi.org/10.3390/math9091011

Chicago/Turabian Style

Cueto, José M., Aurea Grané, and Ignacio Cascos. 2021. "How to Explain the Cross-Section of Equity Returns through Common Principal Components" Mathematics 9, no. 9: 1011. https://doi.org/10.3390/math9091011

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