Identifying the Relative Importance of Stock Characteristics in the UK Market

We address an important empirical question as to which firm-level characteristic best predicts stock returns in the UK equity market. To answer this question, we employ a semiparametric characteristic-based factor model first introduced by Connor, Hagmann and Linton (2012). We also augment their model by including the liquidity characteristic together with the market, size, momentum, volatility and book-to-market factors. We find that momentum is the most important factor and liquidity the least important based on their relative contribution to the fit of the model and the proportion of sample months for which factor returns are significant. Our main results are robust to the states of the economy and to the inclusion of the monthly reversal factor