The Number of Factors in Security Returns

Stephen J. Brown

doi:10.1111/j.1540-6261.1989.tb02652.x

Journal of Finance Vol. 44 No. 5 1989

The Number of Factors in Security Returns

Yamaichi Faculty Fellow, Leonard N. Stern School of Business, New York University. I wish to acknowledge helpful comments of Michael Brennan, Gary Chamberlain, Dolores Conway, Phil Dybvig, Ned Elton, David Fowler, Jon Ingersoll, Shmuel Kandel, Steve Ross, Mike Rothschild, Ravi Shukla, Charles Trzcin

Abstract

Both factor analysis of security returns and the analysis of eigenvalues seem to indicate that a market factor explains the major part of security returns. We find that such evidence is consistent with an economy where there are in fact k “equally important” priced factors; eigenvalue analysis in the context of such an economy will lead an investigator to the false inference that the one important “factor” is the return on an equally weighted market index.

DOI: 10.1111/j.1540-6261.1989.tb02652.x
Volume: 44
Issue: 5
Pages: 1247-1262
Language: en
Sources: bibtex:phds-export.bib crossref openalex

The Number of Factors in Security Returns

Abstract

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