Journal of Financial Economics Vol. 149 No. 1 2023
What matters in a characteristic?
Abstract
We investigate how different components in firm characteristics affect expected returns and comovements in international stock markets. We decompose characteristics into country, industry, and country- and industry-adjusted (i.e., orthogonal) components. Then, we use these components to capture time-series and cross-sectional variations in stock-level alphas and factor exposures. Decomposing characteristics is crucial to explain jointly expected returns and comovements: (i) adjusted (country) components are the most important determinant of alphas (comovements), (ii) component-based models outperform benchmark models, and (iii) alphas are statistically significant. However, alphas have been trending down over time, and alpha-chasing strategies are not profitable once we account for estimation risk and trading costs.
- DOI
- 10.1016/j.jfineco.2023.04.010
- Volume
- 149
- Issue
- 1
- Pages
- 52-72
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref