Capturing the Impact of Unobserved Sector-Wide Shocks on Stock Returns with Panel Data Model

Publication Type:
Journal Article
Citation:
Economic Record, 2015, 91 (295), pp. 495 - 508
Issue Date:
2015-12-01
Full metadata record
Files in This Item:
Filename Description Size
Hong Peng Zhang_05052015.pdf492.57 kB
Adobe PDF
© 2015 Economic Society of Australia. 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 10 years, 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.
Please use this identifier to cite or link to this item: