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Comment: Systematic Interest-Rate Risk in a Two-Index Model of Returns

Published online by Cambridge University Press:  19 October 2009

Bob M. Korkie
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Extract

Bernell Stone's paper extends the single-factor market model to a two-factor model to “better” explain the stochastic process that generates security returns. The inductive search for new models (of which his paper is one) presumably is predicated upon some unsatisfactory results of joint tests of the single-index market model and the capital asset pricing model. It is well known that there are other components of systematic or covariance risk that are not explained by the single-market factor. In the most general sense then, one would conclude that the truth of the return generating process is a multiple factor model, given that the process is indeed linear in the factors. Professor Stone chooses a two-factor (or index) model, in which the known factors are: (1) the return on an equity index, and (2) the return on a bond index. To this extent his interesting work is a special case of the more general work of others.

Type
Las Vegas Versus the Stock Market
Information
Journal of Financial and Quantitative Analysis , Volume 9 , Issue 5 , November 1974 , pp. 723 - 725
Copyright
Copyright © School of Business Administration, University of Washington 1974

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References

REFERENCES

[1]Bildersee, J. S. “Some Aspects of the Performance of New Convertible Preferred Stocks.” Journal of Finance, December 1973, pp. 1187–1202.Google Scholar
[2]Fama, E., and MacBeth, J.. “Risk, Return and Equilibrium: Some Empirical Tests.” Journal of Political Economy, May/June 1973, pp. 607–636.CrossRefGoogle Scholar
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[5]Rosenberg, B. “Extra Market Components of Covariance in Security Returns.” Journal of Financial and Quantitative Analysis, March 1974, pp. 263–274.CrossRefGoogle Scholar