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Mele_2024_Quant Finance_Cross-section without factors
Journal article

Cross-section without factors : a string model for expected returns

  • Distaso, Walter Imperial College, South Kensington Campus, London, United Kingdom
  • Mele, Antonio Istituto di finanza (IFin), Facoltà di scienze economiche, Università della Svizzera italiana, Svizzera
  • Vilkov, Grigory Frankfurt School of Finance & Management, Frankfurt, Germany
  • 2024
Published in:
  • Quantitative Finance. - 2024, vol. 24, no. 6, p. 693–718
String models
Correlation premium
Premium for correlation risk
Cross-section of returns
Big stocks
Arbitrage pricing
Implied correlation
English Many asset pricing models assume that expected returns are driven by common factors. We formulate a model where returns are driven by a string, and no-arbitrage restricts each expected return to capture the asset’s granular exposure to all other asset returns: a correlation premium. The model predicts fresh properties for big stocks, which display higher connectivity in bad times, but also work as correlation hedges: they contribute to a negative fraction of the correlation premium, and portfolios that are more exposed to them command a lower premium. The string model performs at least as well as many existing linear factor models.
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Language
  • English
Classification
Economics
License
CC BY
Open access status
hybrid
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Persistent URL
https://n2t.net/ark:/12658/srd1330149
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