As part of the series of the „Finance Research Seminar“, VGSF welcomes Nick Roussanov from The Wharton School to present his research paper.
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Paper
Common Risk Factors in the Returns on Stocks, Bonds (and Options), Redux
(joint with Zhongtian Chen, Xiaoliang Wang and Dongchen Zou)
Are there risk factors that are pervasive across major classes of corporate securities: stocks, bonds, and options? We employ a novel econometric procedure that relies on asset characteristics to estimate a conditional latent factor model. A common risk factor structure prominently emerges across asset classes. Several common factors explain a substantial amount of time-series variation of individual asset returns across all three asset classes, and have sizable Sharpe ratios. Several of our factors
are highly correlated with some of asset-class-specific factors as well as macroeconomic and financial variables. While a small set of common factors does not fully capture the cross-section of average returns, imposing the factor structure is useful in practice, especially in out-of-sample analysis. A mean-variance efficient portfolio that utilizes asset characteristics achieves a high Sharpe ratio as different asset classes hedge each other’s exposures to the common factors.
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