Pervasive Factors in Stock Returns 1984-1999

Abstract

The purpose of this paper is two fold: on the one hand, to empirically determine the number of systematic risk factors modeled in the APT as developed by Ross (1976 a and b), to be observed in the Chilean stock market during the period 1984-1999; and, on the other, to investigate which would have been a risk premium other than zero. The main results are (a) in the full period there are five pervasive risk factors that make it possible to replicate the covariance matrix of 44 security returns (b) only one of such factors showed statistically significant risk premia in the full period; and (c) for the sub-period 1991-1999 we find 11 factors for a larger sample of 79 securities, where again only one of them (but not necessarily the same one) features a significant risk premium. The paper is organized as follows: Section I briefly reviews the APT and the different methods for estimating it; Section II describes the sample and determines the number of factors and which of such factors are priced. Finally, Section III sets forth the main conclusions arrived at.