skip to content

Faculty of Economics

Journal Cover

Connor, G., Hagmann, M. and Linton, O.

Efficient semiparametric estimation of the Fama–French model and extensions

Econometrica

Vol. 80(2) pp. 713-754 (2012)

Abstract: This paper develops a new estimation procedure for characteristic-based factor models of stock returns. We treat the factor model as a weighted additive nonparametric regression model, with the factor returns serving as time-varying weights and a set of univariate nonparametric functions relating security characteristic to the associated factor betas. We use a time-series and cross-sectional pooled weighted additive nonparametric regression methodology to simultaneously estimate the factor returns and characteristic-beta functions. By avoiding the curse of dimensionality, our methodology allows for a larger number of factors than existing semiparametric methods. We apply the technique to the three-factor Fama–French model, Carhart's four-factor extension of it that adds a momentum factor, and a five-factor extension that adds an own-volatility factor. We find that momentum and own-volatility factors are at least as important, if not more important, than size and value in explaining equity return comovements. We test the multifactor beta pricing theory against a general alternative using a new nonparametric test.

JEL Codes: G12, C14

Author links: Oliver Linton  

Publisher's Link: http://onlinelibrary.wiley.com/doi/10.3982/ECTA7432/abstract



Papers and Publications



Recent Publications


Onatski, A. and Wang, C. Spurious Factor Analysis Econometrica, forthcoming [2020]

Elliott, M. and Golub, B. A Network Approach to Public Goods Journal of Political Economy [2019]

Elliott, M., Georg, C-P. and Hazell, J. Systemic Risk Shifting in Financial Networks Journal of Economic Theory [2021]

Aidt, T. S., Asatryan, Z., Badalyan, L. and Heinemann, F. Vote Buying or (Political) Business (Cycles) as Usual? Review of Economics and Statistics [2020]