SSE/EFI Working Paper Series in Economics and Finance
No 524:
Choosing Factors in a Multifactor Asset Pricing Model: A Bayesian Approach
Johan Ericsson ()
and Sune Karlsson ()
Abstract: We use Bayesian techniques to select factors in a general
multifactor asset pricing model. From a given set of 15 factors we evaluate
all possible pricing models by the extent to which they describe the data
as given by the posterior model probabilities. Interest rates, premiums,
returns on broadbased portfolios and macroeconomic variables are included
in the set of considered factors. Using different portfolios as the
investment universe we find strong evidence that a general multifactor
pricing model should include market excess return, size premium, value
premium and the momentum factor. There is some evidence that yearly growth
rate in industrial production and term spread also are important
factors.
Keywords: asset pricing; factor models; Bayesian model selection; (follow links to similar papers)
JEL-Codes: C11; C52; G12; (follow links to similar papers)
19 pages, April 3, 2003, Revised February 12, 2004
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