Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/130640 
Year of Publication: 
2015
Series/Report no.: 
Staff Report No. 755
Publisher: 
Federal Reserve Bank of New York, New York, NY
Abstract: 
Standard factor pricing models do not capture well the common time-series or cross-sectional variation in average returns of financial stocks. We propose a five-factor asset pricing model that complements the standard Fama and French (1993) three-factor model with a financial sector ROE factor (FROE) and the spread between the financial sector and the market return (SPREAD). This five-factor model helps to alleviate the pricing anomalies for financial sector stocks and also performs well for nonfinancial sector stocks compared with the Fama and French (2014) five-factor model or the Hou, Xue, and Zhang (2014) four-factor models. We find that the aggregate expected return to financial sector equities correlates negatively with aggregate financial sector ROE, which is puzzling, as ROE is commonly used as a measure of the cost of capital in the financial sector.
Subjects: 
cost of capital
financial intermediation
asset pricing
capital structure
JEL: 
G12
G21
G24
G32
Document Type: 
Working Paper

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