Cross-section without factors
a string model for expected returns
Additional information
Authors
Distaso W.,
Mele A.,
Vilkov G.
Type
Journal Article
Year
2024
Language
English
Abstract
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.
Keywords
String models, Correlation premium, Premium for correlation risk, Cross-section of returns, Big stocks, Arbitrage pricing, Implied correlation
Journal
Quantitative Finance
Volume
24
Number ( Month )
6
Pages (or article number)
693–718
Diffusion
License
CC BY
Visibility
Public
Status open access
Hybrid
