One Factor to Bind the Cross-Section of Returns

Nicola Borri, Denis Chetverikov, Yukun Liu and Aleh Tsyvinski
Additional contact information
Denis Chetverikov: University of California, Los Angeles
Yukun Liu: University of Rochester, Simon Business School
Aleh Tsyvinski: Yale University

No 2386, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We propose a new non-linear single-factor asset pricing model. Despite its parsimony, this model represents exactly any non-linear model with an arbitrary number of factors and loadings Ð a consequence of the Kolmogorov-Arnold representation theorem. It features only one pricing component, comprising a nonparametric link function of the time-dependent factor and factor loading that we jointly estimate with sieve-based estimators. Using 171 assets across major classes, our model delivers superior cross-sectional performance with a low-dimensional approximation of the link function. Most known finance and macro factors become insignificant controlling for our single-factor.

Pages: 72 pages
Date: 2024-04
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Related works:
Working Paper: One Factor to Bind the Cross-Section of Returns (2024)
Working Paper: One Factor to Bind the Cross-Section of Returns (2024)
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