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Factor Models of Stock Returns

Student: Elizaveta Anufrieva

Supervisor: Sergey V. Kurochkin

Faculty: Faculty of Economic Sciences

Educational Programme: Economics (Bachelor)

Year of Graduation: 2018

The purpose of this study is to investigate the relationship between the macroeconomic factors and the return of stocks of Russian companies. The goal of this paper is to construct a model that could adequately explain the return of stocks based on the premises that financial market is closely interrelated with Macroeconomics and, therefore, can be explained by such factors. The following steps were performed in order to achieve the goal: • Study two different approaches to the construction of factor models presented in the academic society; • Select the companies most suitable for the analysis; • Recognize which macroeconomic statistics should be included in the model in accordance to the literature; • Identify the optimal model in respect of number-of-parameters and efficiency trade-off. The construction of the model consisted of three steps: first, the preparation of the data (elimination of the seasonality and insurance of the stationarity). In the second step, the PCA method is applied in order to attempt to justify the selected parameters and to overcome the problem of curse of dimensionality. In the last step, the regression is constructed to determine the existing relationship between principal components and Russian stock market. The analysis revealed that constructed model poorly explains the stock return. Even though, for some portfolios the model demonstrated high value of R2-adjusted, further analysis of regression residuals shows that the model is not adequate. This study is delimited to Russian companies, which are listed on Moscow Exchange and are frequently traded. The period of analysis is from December 2013 to November 2016 as previous studies showed that with larger timespans models tend to converge to one of the two extremes: either oversimplifying the connections between variables and significantly loosing explanation power or being overparametrised. The period is also restricted due to lags in publication of macroeconomic data.

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