What question did this study set out to answer?

To develop a model selection framework that determines whether newly introduced factors offer incremental explanatory power in asset pricing beyond hundreds of existing factors.

January 24, 2020The Journal of Finance

Taming the Factor Zoo: A Test of New Factors

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Authors

GFGuanhao FengCity University of Hong Kong SGStefano GiglioNational Bureau of Economic Research DXDacheng XiuNational Bureau of Economic Research

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Implication

Econometric analysis reveals most newly proposed factors are redundant against existing benchmarks, indicating only a small subset provides incremental explanatory value.

Key Points

To develop a model selection framework that determines whether newly introduced factors offer incremental explanatory power in asset pricing beyond hundreds of existing factors.
Formulated a model selection procedure that explicitly corrects for omitted variable bias resulting from imperfect variable selection in high-dimensional settings.
Applied the selection methodology to systematically test recently proposed asset pricing factors against a large benchmark of previously established factors.
Most newly discovered asset pricing factors are statistically redundant when conditioned on the high-dimensional set of existing factors.
A small fraction of recent factors retains statistically significant explanatory power beyond the hundreds of factors previously identified in the literature.

Cite This Study

Feng et al. (2020) studied this question.

synapsesocial.com/papers/69d7293a3f906f6a06bef7f0 https://doi.org/10.1111/jofi.12883

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Implication

Econometric analysis reveals most newly proposed factors are redundant against existing benchmarks, indicating only a small subset provides incremental explanatory value.

Taming the Factor Zoo: A Test of New Factors

Discussion

Member takes

Implication

Key Points

Cite This Study

Taming the Factor Zoo: A Test of New Factors

Discussion

Member takes

Implication

Key Points

Cite This Study

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