How many factors are important in U.K. stock returns?

Jonathan Fletcher

Research output: Contribution to journal › Article

Abstract

I use the sequential approach of Harvey and Liu(2018) to build linear factor models in U.K. stock returns among a set of 13 candidate factors using individual stocks and three groups of test portfolios between July 1983 and December 2017. My study finds that the Market factor is the dominant factor in reducing mispricing in individual stocks and test portfolios regardless of the pricing error metric used. The Market factor has a bigger impact when using a value weighting pricing error metric. Whether a second factor is used or not depends upon which metric is used for mispricing and the time period examined. My study finds support for a two-factor model for the whole sample period of the Market factor and the Conservative Minus Aggressive (CMA) factor of Fama and French(2015) when giving greater weight to the mispricing of larger companies.
LanguageEnglish
Pages1234-1249
Number of pages16
JournalEuropean Journal of Finance
Volume25
Issue number13
Early online date5 Mar 2019
DOIs
Publication statusPublished - 2 Sep 2019

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Factors
Market factors
Stock returns
Mispricing
Pricing errors
Weighting
Large companies
Individual factors

Keywords

  • linear factor models
  • multiple testing
  • bootstrap

Cite this

Fletcher, Jonathan. / How many factors are important in U.K. stock returns?. In: European Journal of Finance. 2019 ; Vol. 25, No. 13. pp. 1234-1249.
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Fletcher, J 2019, 'How many factors are important in U.K. stock returns?' European Journal of Finance, vol. 25, no. 13, pp. 1234-1249. https://doi.org/10.1080/1351847X.2019.1586745

How many factors are important in U.K. stock returns? / Fletcher, Jonathan.

In: European Journal of Finance, Vol. 25, No. 13, 02.09.2019, p. 1234-1249.

Research output: Contribution to journal › Article

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Fletcher J. How many factors are important in U.K. stock returns? European Journal of Finance. 2019 Sep 2;25(13):1234-1249. https://doi.org/10.1080/1351847X.2019.1586745

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