What does high-dimensional factor analysis tell us about risk factors in the Australian stock market?

Colin T. Bowers, Chris Heaton

Research output: Contribution to journalArticleResearchpeer-review

Abstract

Estimates of the cost of equity are often sensitive to the specification of the linear factor model used in their construction. In this article, we use techniques developed for high-dimensional factor models to consider the identity of systematic risk factors in the Australian equities market. Our results support the use of neither the Capital Asset Pricing Model (CAPM) nor the Fama and French model, although they provide an explanation for the empirical performance of these models. Many other model specifications are also rejected. We find that a single-factor model with an equal-weighted market index is the best model for estimating the cost of equity in the Australian context.

LanguageEnglish
Pages1395-1404
Number of pages10
JournalApplied Economics
Volume45
Issue number11
DOIs
Publication statusPublished - Apr 2013

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Stock market
Risk factors
Factor analysis
Cost of equity
Model specification
Systematic risk
Market index
Equity markets
Capital asset pricing model

Cite this

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What does high-dimensional factor analysis tell us about risk factors in the Australian stock market? / Bowers, Colin T.; Heaton, Chris.

In: Applied Economics, Vol. 45, No. 11, 04.2013, p. 1395-1404.

Research output: Contribution to journalArticleResearchpeer-review

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