New method uncovers key factors for asset pricing, improving investment strategies.
The study shows that market betas don't explain differences in expected stock returns well. By adding common factors in excess returns to the Capital Asset Pricing Model, market betas become less useful. The researchers suggest a new method to identify important factors for asset pricing by using principal components from a large set of stock returns. They found that the Fama-French model captures a lot of relevant information but can still be improved.