Taming the Factor Zoo: A Test of New Factors / Guanhao Feng, Stefano Giglio, Dacheng Xiu.

Format:

Book

Author/Creator:

Feng, Guanhao.

Contributor:

National Bureau of Economic Research.

Giglio, Stefano.

Xiu, Dacheng.

Series:

Working Paper Series (National Bureau of Economic Research) no. w25481.

NBER working paper series no. w25481

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Taming the Factor Zoo

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2019.

Summary:

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 explicitly accounts for potential model-selection mistakes, unlike the standard approaches that assume perfect variable selection, which rarely occurs in practice and produces a bias due to the omitted variables. We apply our procedure to a set of factors recently discovered in the literature. While most of these new factors are found to be redundant relative to the existing factors, a few -- such as profitability -- have statistically significant explanatory power beyond the hundreds of factors proposed in the past. In addition, we show that our estimates and their significance are stable, whereas the model selected by simple LASSO is not.

Notes:

Print version record

January 2019.