Capturing the Impact of Unobserved Sector-Wide Shocks on Stock Returns with Panel Data Model
- Authors
- Hong, Kihoon Jimmy; Peng, Bin; Zhang, Xiaohui
- Issue Date
- Dec-2015
- Publisher
- WILEY
- Citation
- ECONOMIC RECORD, v.91, no.295, pp.495 - 508
- Journal Title
- ECONOMIC RECORD
- Volume
- 91
- Number
- 295
- Start Page
- 495
- End Page
- 508
- URI
- https://scholarworks.bwise.kr/hongik/handle/2020.sw.hongik/13626
- DOI
- 10.1111/1475-4932.12208
- ISSN
- 0013-0249
- Abstract
- Unobserved sector-wide common shocks cause the issue of cross-sectional dependence (CSD) in panel data modelling of stock returns. In this study we apply two econometric techniques: the seemingly unrelated regression approach and a Bayesian estimator for panel data models with factor structural errors, to allow for CSD within a particular sector. By applying these models to monthly stock returns of S&P100 companies from six sectors over 10years, we can capture and measure the heterogeneous impacts of not only observed individual company accounting fundamentals and market-wide common shocks, but also unobservable sector-wide common shocks. Results from the empirical study show that the impacts from both observed factors and unobserved sector-wide common shocks vary markedly across companies. After controlling for observed accounting fundamentals and market-wide common factors, a considerable proportion of the variation in stock returns can be attributed to unobservable sector-wide common shocks.
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