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


Vol. 80 no. 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.

Keywords: Additive models, arbitrage pricing theory, characteristic-based factormodel, kernel estimation, nonparametric regression

JEL Codes: G12, C14

Author links: Oliver Linton  

Publisher's Link:

Papers and Publications

Recent Publications

Merrick Li, Z. and Linton, O. A ReMeDI for Microstructure Noise Econometrica [2022]

Porzio, T., Rossi, F. and Santangelo, G. The Human Side of Structural Transformation American Economic Review [2022]

Rauh, C. and Valladares-Esteban, A. On the Black-White Gaps in Labor Supply and Earnings over the Lifecycle in the US Review of Economic Dynamics [2023]

Carneiro, P., Liu, K. and Salvanes, K. G. The Supply of Skill and Endogenous Technical Change: Evidence from a College Expansion Reform Journal of the European Economic Association [2023]