Gregory Koutmos
Professor, Fairfield University, USA.
Johan Knif
Hanken School of Economics, Finland.
James Kolari
Professor, Texas A&M University, USA.
Seppo Pynnonen
University of Vaasa, Finland.The Role of Multifactors in Asset Pricing Models
This study revisits the issue of the role of multifactors in traditional
asset pricing models from three different empirical perspectives. First, a
new measure of the absolute return contribution of a risk factors is
presented. The importance of market, size, value, momentum,
investment and return on asset risk factors is monitored for 49 US
industry portfolios over January 1972 to June 2009. Second, the
robustness of the factor loading, both sign and level, over different
portfolio outcomes is studied. Third, the significance and stability over
time of conditional factor loadings are analyzed. The results indicate
that the return contribution mainly comes from the market factor and
the mispricing. The absolute return contribution of individual
multifactors are less than the contribution of the mispricing (alpha) and
the effect on mispricing is minimal. Instead, multifactors partly overlap
with the return contribution of the market factor. The results also
indicate that the loading on the market factor is very robust over
different return outcomes of the asset portfolio. The multifactors, on the
other hand, exhibit variation in loading in a sense that the sign and
level is dependent on the realized outcome indicating. Furthermore,
reduction of mispricing variance using multifactors is minimal but
multifactors improve statistical significance and time stability of the
conditional loading on the market factor. Conditional loadings on
multifactors are often dynamic over time with only occasional
statistically significant months.