Instability of Factor Strength in Asset Returns

We study the problem of detecting structural instability of factor strength in asset pricing models for financial returns with observable factors. We allow for strong and weaker factors, in which the sum of squared betas grows at a rate equal to and slower than the number of test assets, respectively: this growth rate determines the strength of the corresponding factor. We propose LM and Wald statistics for the null hypothesis of stability and derive their asymptotic distribution when the break fraction is known, as well as when it is unknown and has to be estimated. We corroborate our theoretical results through a comprehensive series of Monte Carlo experiments. An extensive empirical analysis uncovers the dynamics of instability of factor strength in financial returns from equity portfolios.

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Publication Details

Journal
Journal of Business and Economic Statistics
Published
2024-12-23
DOI
https://doi.org/10.1080/07350015.2024.2444344
Citations
1
Primary Topic
Financial Markets and Investment Strategies
Type
article
Field-Weighted Citation Impact
0.54

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article

Instability of Factor Strength in Asset Returns

Daniele Massacci
1 citations
Journal of Business and Economic Statistics
Financial Markets and Investment Strategies
0.54
article

Instability of Factor Strength in Asset Returns

Daniele Massacci
article en
1 citations

Abstract

We study the problem of detecting structural instability of factor strength in asset pricing models for financial returns with observable factors. We allow for strong and weaker factors, in which the sum of squared betas grows at a rate equal to and slower than the number of test assets, respectively: this growth rate determines the strength of the corresponding factor. We propose LM and Wald statistics for the null hypothesis of stability and derive their asymptotic distribution when the break fraction is known, as well as when it is unknown and has to be estimated. We corroborate our theoretical results through a comprehensive series of Monte Carlo experiments. An extensive empirical analysis uncovers the dynamics of instability of factor strength in financial returns from equity portfolios.

Journal of Business and Economic StatisticsVol. 43(4)
King's College London (GB), King's College School (GB)
National Science Foundation, International Association for Applied Econometrics
Openalex Percentile: Top 27%
Financial Markets and Investment Strategies
0.54
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Instability of Factor Strength in Asset Returns — Daniele Massacci · Journal of Business and Economic Statistics (2024) | TGRS Research Map | TGRS