Work

Dynamic Factors and Asset Pricing

Year: 2010

Type: article

Abstract: This study develops an econometric model that incorporates features of price dynamics across assets as well as through time. With the dynamic factors extracted via the Kalman filter, we formulate an asset pricing model, termed the dynamic factor pricing model (DFPM). We then conduct asset pricing tests in the in-sample and out-of-sample contexts. Our analyses show that the ex ante factors are a key component in asset pricing and forecasting. By using the ex ante factors, the DFPM improves upon the explanatory and predictive power of other competing models, including unconditional and conditional versions of the Fama and French (1993) 3-factor model. In particular, the DFPM can explain and better forecast the momentum portfolio returns, which are mostly missed by alternative models.

Source: Journal of Financial and Quantitative Analysis

DOI: 10.1017/s0022109010000207

Authors: Zhongzhi (Lawrence) He, Sahn-Wook Huh, Bong-Soo Lee

Institutions: Shanghai University of Finance and Economics, Brock University, University at Buffalo, State University of New York, Florida State University

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W3122864594

FWCI: 5.528

Cites: 57

Cited by: 22

Related to: 10