The Seasonal Stability of the Factor Structure of Stock Returns




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    • School of Business, University of Wisconsin, and School of Management, Boston University, respectively. We have benefited from the comments of the participants of the workshops at the Florida International University, Santa Clara University, University of Illinois, University of Michigan, University of Waterloo, and University of Wisconsin. An earlier version of this paper was presented at the University of Southern California Conference on Empirical Research on the APT and the 1986 Western Finance Association Meetings. We also wish to thank K. Jeon and J. Lee for their assistance. This project was started while W. M. Taylor was at the University of Wisconsin and completed while he was visiting Northwestern University.


This paper investigates the month-by-month stability of (a) daily returns and correlation coefficients of stock returns, (b) correlation and covariance matrices, (c) number of return-generating factors, and (d) the APT pricing relationship. The results show that there is a January effect and a small-firm effect in stock returns. Correlation matrices are more stable than covariance matrices, but both types of matrices are not stable across months and across the sample groups. The number of return-generating factors is rather stable most of the time and for most of the sample groups, but there is some significant instability that is related to the average correlation coefficients among stocks. The APT pricing relationship does not seem to be supported by the two-stage process using the maximum-likelihood factor analysis.