Future Security Returns and Factor Model Information Content Público

Weaver, Jonathan William (2010)

Permanent URL: https://etd.library.emory.edu/concern/etds/3x816n13z?locale=es
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Abstract

Abstract
Future Security Returns and Factor Model Information Content
By
Jonathan W. Weaver
In this paper I use the R-squared of a factor model estimated over the prior five years to
examine whether future returns can be explained by a stock's past ratio of explained
volatility to total volatility. I argue that the lack of success of a factor model in providing
useful output creates an ambiguity premium that increases future expected returns. I find
evidence that this is in fact the case, and for the 41 years from 1968 to 2008, the R-
squared from the factor loading estimation period is superior to both idiosyncratic and
total risk in sorting future returns. Considering what is known relative to what is
unknown for a stock's risk in a portfolio is a more precise measure to examine a premium
for lack of information, or ambiguity. I find that R-squared also is related to future risk
and is informative in predicting systematic risk estimation error. The R-squared retains
predictive power while holding idiosyncratic, systematic, or total risk quintiles constant.

Table of Contents

Table of Contents

1. Introduction 1
2. A Simulation of Calculated R-Squared and Beta 8
3. Data and Methodology 11
4. Empirical Findings 16
5. Alternative Measures of Model Uncertainty 27
6. Conclusion 29
References 32
Figures 35
Tables 36

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