Taming the Factor Zoo: A Test of New Factors

Guanhao Feng, Stefano Giglio, Dacheng XiuFinance资产定价UTD24

Journal of Finance2020-01-24National Bureau of Economic Research; Centre for Economic Policy Research; Yale UniversityDOI

Citations675

Influential24

References164

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TL;DR

A model-selection method to systematically evaluate the contribution to asset pricing of any new factor, above and beyond what a high-dimensional set of existing factors explains, is proposed.

ABSTRACT We propose a model selection method to systematically evaluate the contribution to asset pricing of any new factor, above and beyond what a high‐dimensional set of existing factors explains. Our methodology accounts for model selection mistakes that produce a bias due to omitted variables, unlike standard approaches that assume perfect variable selection. We apply our procedure to a set of factors recently discovered in the literature. While most of these new factors are shown to be redundant relative to the existing factors, a few have statistically significant explanatory power beyond the hundreds of factors proposed in the past.

Selection (genetic algorithm)Explanatory powerSet (abstract data type)EconometricsComputer scienceTest (biology)Factor (programming language)Capital asset pricing modelModel selectionAsset (computer security)EconomicsArtificial intelligence