Firm Characteristics and the Cross-Section of Covariance Risk

Download or read book Firm Characteristics and the Cross-Section of Covariance Risk written by Chris Kirby and published by . This book was released on 2018 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: I analyze the cross-section of covariance risk for individual stocks using a new type of multivariate volatility model in which firm characteristics serve as time-varying loadings on fundamental factors. The evidence points to strong linkages between firm characteristics and covariance risk, and also reveals that cross-sectional differences in covariance risk explain much of the cross-sectional variation in expected excess stock returns. I find, for example, that the fundamental factors perform at least as well as the Fama-French factors in regression-based pricing tests. In view of its tractability and performance, the proposed model should find use in a variety of applications.