The level, slope, and curve factor model for stocks

Charles Clarke

Research output: Contribution to journalArticlepeer-review

10 Scopus citations

Abstract

I develop a method to extract only the priced factors from stock returns. The first step estimates expected returns based on firm characteristics. The second step uses the estimated expected returns to form portfolios. The last step uses principal component analysis to extract factors from the portfolio returns. The procedure isolates and emphasizes the comovement across assets that is related to expected returns as opposed to firm characteristics. It produces three factors–level, slope, and curve–which perform as well or better than other leading models. The methodology performs well in out-of-sample tests. The new factors have macroeconomic risk interpretations.

Original languageEnglish
Pages (from-to)159-187
Number of pages29
JournalJournal of Financial Economics
Volume143
Issue number1
DOIs
StatePublished - Jan 2022

Bibliographical note

Publisher Copyright:
© 2021 Elsevier B.V.

Keywords

  • Anomaly
  • Arbitrage pricing theory
  • Cross-section of returns
  • Factor model

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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