Yes / There is no consensus in the literature as to which stock characteristic best explains returns. In this study, we employ a novel econometric approach better suited than the traditional characteristic sorting method to answer this question for the UK market. We evaluate the relative explanatory power of market, size, momentum, volatility, liquidity and book-to-market factors in a semiparametric characteristic-based factor model which does not require constructing characteristic portfolios. We find that momentum is the most important factor and liquidity is the least important based on their relative contribution to the fit of the model and the proportion of sample months for which factor returns are significant. Our evidence supports the view that irrational investor behaviour may drive stock returns.
| Identifer | oai:union.ndltd.org:BRADFORD/oai:bradscholars.brad.ac.uk:10454/9828 |
| Date | 21 January 2016 |
| Creators | French, D., Wu, Yuliang, Li, Y. |
| Source Sets | Bradford Scholars |
| Language | English |
| Detected Language | English |
| Type | Article, Accepted manuscript |
| Rights | © 2016 Elsevier. Reproduced in accordance with the publisher's self-archiving policy. This manuscript version is made available under the CC-BY-NC-ND 4.0 license (http://creativecommons.org/licenses/by-nc-nd/4.0/) |
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