Enhanced Global Asset Pricing Factors


Zimmermann, Lukas


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DOI: https://doi.org/10.1017/S0022109022001090
URL: https://www.cambridge.org/core/journals/journal-of...
URN: urn:nbn:de:bsz:180-madoc-619475
Document Type: Article
Year of publication: 2023
The title of a journal, publication series: Journal of Financial and Quantitative Analysis : JFQA
Volume: 58
Issue number: 6
Page range: 2692-2731
Place of publication: New York, NY
Publishing house: Cambridge University Press
ISSN: 0022-1090 , 1756-6916
Publication language: English
Institution: Business School > ABWL u. Finanzierung (Theissen 2009-)
Pre-existing license: Creative Commons Attribution 4.0 International (CC BY 4.0)
Subject: 330 Economics
Abstract: This paper constructs and examines enhanced global return factors. We focus on three different enhancement approaches. First, we incorporate information about the covariance structure in the cross-section of stock returns. Second, we employ volatility-reducing techniques in the time-series. Third, we exploit diversification benefits. We form six categorical factors by aggregating information from 214 characteristics. Further, we diversify across factors. The enhancement mechanisms are largely successful and when jointly applied increase the optimal Sharpe ratio on average by a factor of 1.96 compared to the traditional factors. Our results point to the importance of employing efficient factors in asset pricing studies.




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