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Identifying the relative importance of stock characteristics

French, Declan; Wu, Yuliang; Li, Youwei

Authors

Declan French

Yuliang Wu



Abstract

There is no consensus in the literature as to which stock characteristic best explains returns. In this study, we employ a novel econometric approach better suited than the traditional characteristic sorting method to answer this question for the UK market. We evaluate the relative explanatory power of market, size, momentum, volatility, liquidity and book-to-market factors in a semiparametric characteristic-based factor model which does not require constructing characteristic portfolios. We find that momentum is the most important factor and liquidity is the least important based on their relative contribution to the fit of the model and the proportion of sample months for which factor returns are significant. Overall, this study provides strong evidence to support that the momentum characteristic can best explain stock returns in the UK market. The econometric approach employed in this study is a novel way to assess relevant investment risk in international financial markets outside U.S. Moreover, multinational institutions and investors can use this approach to identify regional factors in order to diversify their portfolios.

Journal Article Type Article
Publication Date 2016-03
Journal Journal of Multinational Financial Management
Print ISSN 1042-444X
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 34
Pages 80-91
APA6 Citation French, D., Wu, Y., & Li, Y. (2016). Identifying the relative importance of stock characteristics. Journal of Multinational Financial Management, 34, 80-91. https://doi.org/10.1016/j.mulfin.2016.01.002
DOI https://doi.org/10.1016/j.mulfin.2016.01.002
Keywords Stock characteristics; Factor models
Publisher URL https://www.sciencedirect.com/science/article/pii/S1042444X16300020?via%3Dihub
Related Public URLs https://pure.qub.ac.uk/en/publications/identifying-the-relative-importance-of-stock-characteristics
Additional Information This article is maintained by: Elsevier; Article Title: Identifying the relative importance of stock characteristics; Journal Title: Journal of Multinational Financial Management; CrossRef DOI link to publisher maintained version: https://doi.org/10.1016/j.mulfin.2016.01.002; Content Type: article; Copyright: Copyright © 2016 Elsevier B.V. All rights reserved.
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