Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/130640
Authors: 
Adrian, Tobias
Friedman, Evan
Muir, Tyler
Year of Publication: 
2015
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 755
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

Files in This Item:
File
Size
824.39 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.