Extracting Statistical Factors When Betas are Time-Varying

Patrick Gagliardini and Hao Ma
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Patrick Gagliardini: USI Università della Svizzera italiana; Swiss Finance Institute

No 19-65, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper deals with identification and inference on the unobservable conditional factor space and its dimension in large unbalanced panels of asset returns. The model specification is nonparametric regarding the way the loadings vary in time as functions of common shocks and individual characteristics. The number of active factors can also be time-varying as an effect of the changing macroeconomic environment. The method deploys Instrumental Variables (IV) which have full-rank covariation with the factor betas in the cross-section. It allows for a large dimension of the vector generating the conditioning information by machine learning techniques. In an empirical application, we infer the conditional factor space in the panel of monthly returns of individual stocks in the CRSP dataset between January 1971 and December 2017.

Keywords: Large Panel; Unobservable Factors; Conditioning Information; Instrumental Variables; Machine Learning; Post-Lasso; Artificial Neural Networks (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Pages: 70 pages
Date: 2019-07
New Economics Papers: this item is included in nep-big, nep-cmp and nep-ecm
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1965

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