Abstract
In this paper, we use a cross-sectional approach to get a deeper comprehension of the common risk profile of stock returns. Instead of employing static and ad hoc factor selection procedure an in Fama and French (1993), we use asymptotic developments of Bai and Ng (2002, 2006) to select the relevant factors. We thus reconcile two methodologies: the statistic one and the other, founded on the observed factors. We apply our approach to French and US stock markets over the period 1999 to 2008 and test the performance of several traditional observed factors, such as credit spread and firm-characteristic variables of Fama and French (1993) and Carhart (1997). Our results put in evidence strong time and country dependencies of stock risk profile.
