Transformed Securities and Alternative Factor Structures




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    • Owen Graduate School of Management, Vanderbilt University, Nashville, TN 37203 and Leavey School of Business, Santa Clara University, Santa Clara, CA 95053, respectively. We are grateful to Stephen Buser (co-editor), Bill Christie, and an anonymous referee for their comments. Roger Huang acknowledges financial support from the Dean's Fund for Research at the Owen Graduate School of Management and the Financial Markets Research Center at Vanderbilt University. Hoje Jo is grateful to the Leavey School of Business for research support.


Grinblatt and Titman (1985) reformulate a result of Chamberlain and Rothschild (1983) to show that the approximate factor structure of Chamberlain and Rothschild is asymptotically equivalent to the strict factor structure of Ross (1976) as long as investors can always repackage securities into an equal number of arbitrary portfolios. This paper uses a Procrustes rotation methodology that is compatible with the repackaging interpretation of Grinblatt and Titman to show that the empirical structure of stock prices is consistent with the convergency hypothesis.