The Seasonal Stability of the Factor Structure of Stock Returns.

This paper investigates the month-by-month stability of (1) daily returns and correlation coe fficients of stock returns; (2) correlation and covariance matrices; (3) the number of return-generating factors; and (4) the APT pricing relationships. The results show that there is a January effect and a small-firm effect in stock returns. Correlation and covariance matric es are not stable across months and across the sample groups. The num ber of return-generating factors is rather stable with occasional ins tabilities that are related to the average correlation coefficients a mong stocks. The APT pricing relationship does not seem to be support ed by the two-stage process using the maximum likelihood factor analy sis. Copyright 1987 by American Finance Association.