Unique Factors

摘要

In a multifactor model, individual stock returns are either determined by common risk factors that in?uence almost all stocks, or idiosyncratic risks that only a?ect severl stocks at most. With the deteriating explanatory power of the popular Fama and French three factor model, we focus on factors that may have impact only on certain groups of stocks in this paper. We call these factors Unique Factors. In particular, we present a simple approach both to extract unique factors from stock returns and to group stocks simultaneously. This allows us to have a parsimonious structure for individual stock returns with a very few number of groups. As a result, we ?nd that a multifactor model with two common factors and two unique factors has superior explanatory power both in- and out-of-sample than models with only common factors including the Fama and French's (1992) factors and momentum factors. Moreover, in contrast to the declining explanatory power of common factors, the explanatory power of unique factors has increased over the past forty years.