Department of Economics and Business Economics

The dynamics of factor loadings in the cross-section of returns

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  • Riccardo Borghi, Cass Business School, United Kingdom
  • Eric Hillebrand
  • Jakob Mikkelsen, Danmarks Nationalbank, Denmark
  • Giovanni Urga, Cass Business School, United Kingdom
In this paper, we propose a two-level factor model with time-varying loadings to investigate the dynamics of factor betas in the cross-section of returns of a large portfolio of 1815 firms from 54 countries over the period 2006-2016. The model contains a global observed financial factor and unobserved global and regional factors consistently estimated via principal component. When unexpected events happen globally, loadings on global factors increase. The dynamics of the global factor loadings is related to the profile of the firm. Loadings persistence is decreasing in firm size and expected returns are increasing in the variance of the loading.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages50
Publication statusPublished - 20 Dec 2018
SeriesCREATES Research Papers
Number2018-38

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