Cross-section without factors : a string model for expected returns
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Distaso, Walter
Imperial College, South Kensington Campus, London, United Kingdom
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Mele, Antonio
Istituto di finanza (IFin), Facoltà di scienze economiche, Università della Svizzera italiana, Svizzera
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Vilkov, Grigory
Frankfurt School of Finance & Management, Frankfurt, Germany
Published in:
- Quantitative Finance. - 2024, vol. 24, no. 6, p. 693–718
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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Classification
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Economics
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License
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CC BY
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Open access status
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hybrid
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Persistent URL
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https://n2t.net/ark:/12658/srd1330149
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