Factor Models as "Explanatory UniÖers" versus "Explanatory Ideals" of Empirical Regularities of Stock Returns

Koundouri, Phoebe and Kourogenis, Nikolaos and Pittis, Nikitas and Samartzis, Panagiotis (2015): Factor Models as "Explanatory UniÖers" versus "Explanatory Ideals" of Empirical Regularities of Stock Returns. Published in:

Abstract

In this paper we investigate whether the empirical regularities of stock returns are independent of each other or whether any one of them implies all the others. If such a regularity exists, it is called 'fundamental' and is usually thought of as a 'deductive explanation' of the others. We demonstrate that such a fundamental regularity of stock returns is the one represented by the single factor model with a stochastically persistent beta coefficient (SFM- AR). Indeed, this regularity alone entails all the usual regularities of stock returns, including conditional heteroskedasticity, leptokurtosis aggregational Gaussianity and aggregational Independence. Hence, SFM-AR may be thought of as an "explanatory unifier" of the empirical regularities of stock returns. However, since the theoretical origins of SFM-AR are weak, its explanatory status falls short of meeting the standards of the 'ideal explanatory text'.

• Item Type: MPRA Paper
• Language: English
• Keywords: empirical regularities, stock returns, single factor model, autoregressive beta, statistical explanation
• Subjects: C - Mathematical and Quantitative Methods > C0 - General; Y - Miscellaneous Categories > Y1 - Data: Tables and Charts

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