Arbitrage Pricing Theory for Idiosyncratic Variance Factors PRELIMINARY AND INCOMPLETE: PLEASE DO NOT CITE WITHOUT PERMISSION
نویسندگان
چکیده
Recent research has documented the existence of common factors in individual asset’s idiosyncratic variances or squared idiosyncratic returns. We provide an Arbitrage Pricing Theory that leads to a linear factor structure for prices of squared excess returns. This pricing representation allows us to study the interplay of factors at the return level with those in idiosyncratic variances. We document the presence of a common volatility factors. Linear returns do not have exposure to this factor when using at least five principal components as linear factors. The price of the common volatility factor is zero. JEL codes : C58, G12.
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