NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Risk and Return from Factors

Louis K. C. Chan, Jason Karceski, Josef Lakonishok

NBER Working Paper No. 6098
Issued in July 1997
NBER Program(s):   AP

The ability to identify which factors best capture systematic return covariation is central to applications of multifactor pricing models. This paper uses a common data set to evaluate the performance of various proposed factors in capturing return comovements. Factors associated with the market, size, past return, book-to-market and dividend yield help explain return comovement on an out-of-sample basis (although they are not necessarily associated with large premiums in average returns). Except for the default premium and the term premium, macroeconomic factors perform poorly. We document regularities in the behavior of the more important factors, and confirm their influence in the Japanese and U.K. markets as well.

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Document Object Identifier (DOI): 10.3386/w6098

Published: JFQA, Vol. 33, no. 2 (June 1998): 159-188.

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