How many factors are important in U.K. stock returns?

Fletcher, Jonathan (2019) How many factors are important in U.K. stock returns? European Journal of Finance, 25 (13). pp. 1234-1249. ISSN 1351-847X (https://doi.org/10.1080/1351847X.2019.1586745)

[thumbnail of Fletcher-EJF2019-How-many-factors-are-important-in-UK-stock-returns]
Preview
 Text. Filename: Fletcher_EJF2019_How_many_factors_are_important_in_UK_stock_returns.pdf
Accepted Author Manuscript
Download (863kB)| Preview

Abstract

I use the sequential approach of Harvey and Liu (2018) to build linear factor models in U.K. stock returns among a set of 13 candidate factors using individual stocks and three groups of test portfolios between July 1983 and December 2017. My study finds that the Market factor is the dominant factor in reducing mispricing in individual stocks and test portfolios regardless of the pricing error metric used. The Market factor has a bigger impact when using a value weighting pricing error metric. Whether a second factor is used or not depends upon which metric is used for mispricing and the time period examined. My study finds support for a two-factor model for the whole sample period of the Market factor and the Conservative Minus Aggressive (CMA) factor of Fama and French(2015) when giving greater weight to the mispricing of larger companies.

ORCID iDs

Fletcher, Jonathan ORCID logoORCID: https://orcid.org/0000-0003-0568-9145;
CORE (COnnecting REpositories)