Extra-Market Components of Covariance in Security Returns

Rosenberg, Barr

doi:10.2307/2330104

Cited by 296Financial Markets and Investment StrategiesFinancial Risk and Volatility ModelingFinancial Analysis and Corporate Governance

Extra-Market Components of Covariance in Security Returns

Rosenberg, Barr·1974·The Journal of Financial and Quantitative Analysis

DOI 10.2307/2330104

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Abstract

This study is concerned with the multiple-factor model of security returns, with its implications for a single-factor, market-index model applied to the same securities, and with statistical methods of estimating the parameters of a multiple-factor model and thereby operationalizing it. This part of the paper sets out the approach. The sequel will present the empirical results. The results show that there are highly significant extra-market components of covariance among security returns; moreover, these risk components are such that the loadings of individual security returns on the factors are determined by observable characteristics of the firm: income statement and balance sheet data, industry membership, and historical behavior of returns on the security. The results also show that the conventional security beta is a function of these same characteristics.

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The overarching model specified by (2) and (21) nests many models proposed in the literature.
“The overarching model specified by ( 2) and ( 21) nests many models proposed in the literature (Rosenberg 1974; Harvey and Ferson 1999, among others).”
From Empirical Asset Pricing via Machine Learning (2020) · cites this paper as Rosenberg 1974

THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS**This paper is another in a series of interrelated theoretical and statistical studies of corporate financial and investment policies being made under grants from the Rockefeller Foundation, and more recently the Ford Foundation, to the Harvard Business School. The generous support for this work is most gratefully acknowledged. The author is also much indebted to his colleagues Professors Bishop, Christenson, Kahr, Raiffa, and (especially) Schlaifer, for extensive discussion and commentary on an earlier draft of this paper; but responsibility for any errors or imperfections remains strictly his own.[Professor Sharpe's paper, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk” (Journal of Finance, September 1964) appeared after this paper was in final form and on its way to the printers. My first section, which parallels the first half of his paper (with corresponding conclusions), sets the algebraic framework for sections II, III and VI, (which have no counterpart in his paper) and for section IV on the equilibrium prices of risk assets, concerning which our results differ significantly for reasons which will be explored elsewhere. Sharpe does not take up the capital budgeting problem developed in section V below.]
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Authors: Rosenberg, B.
Corresponding author: Rosenberg, Barr
ORCID: Rosenberg, Barr
Venue: The Journal of Financial and Quantitative Analysis
Publisher: JSTOR
Published: 1974-03
Volume: 9
Issue: 2
Pages: 263
ISSN: 0022-1090 (ISSN-L)
DOI: 10.2307/2330104
OpenAlex: W2139753118
Cited by: 296
References: 9
Citations by year: 2026: 5 · 2025: 10 · 2024: 8 · 2023: 13 · 2022: 15 · 2021: 12 · 2020: 15 · 2019: 7 · 2018: 13 · 2017: 18 · 2016: 14 · 2015: 11 · 2014: 5 · 2013: 11 · 2012: 7
FWCI: 3.19
Type: journal article
Language: en
Open access: closed
Locations: Journal of Financial and Quantitative Analysis (publishedVersion)
RePEc: Research Papers in Economics (submittedVersion)
Topics: Social Sciences › Economics, Econometrics and Finance › Finance › Financial Markets and Investment Strategies
Social Sciences › Economics, Econometrics and Finance › Finance › Financial Risk and Volatility Modeling
Social Sciences › Business, Management and Accounting › Accounting › Financial Analysis and Corporate Governance
Keywords: security returns, multi-factor models, beta, factor loadings, firm characteristics, balance sheet data, industry membership, return predictability

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Registry, retraction, Cites and statistics results are computed, not judged, with one exception: a printed reference that no index lists is read once by a model before it counts as a citation error. Claims are extracted by a model and kept only when their quote appears verbatim in the text; each cited source is then checked, with a model’s help, for whether it says what the claim relies on. Those verdicts can be wrong — read the claim’s quote and the cited source before relying on one.

Statistics and arithmetic are recomputed, not judged.

Confidence bands are shown only for fields calibrated on our annotated test set. None is calibrated yet, so no band is shown.

What counts as a claim ›How we measure confidence ›How we check this ›

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Extra-Market Components of Covariance in Security Returns

Abstract

Integrity signals

Claims the paper makes

Claims other papers make about this one

Cites

Cited by

Related

Record

About these checks