Taming the Factor Zoo: A Test of New Factors

Stefano Giglio, Guanhao Feng () and Dacheng Xiu

No 14266, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Factors; Stochastic discount factor; Post-selection inference; Regularized two-pass estimation; Variable selection; Machine learning; Lasso; Elastic net; Pca (search for similar items in EconPapers)
Date: 2020-01
New Economics Papers: this item is included in nep-big and nep-cmp
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Citations: View citations in EconPapers (161)

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Related works:
Journal Article: Taming the Factor Zoo: A Test of New Factors (2020)
Working Paper: Taming the Factor Zoo: A Test of New Factors (2019)
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