Fundamental properties of linear factor models

Damir Filipović and Paul Schneider
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Damir Filipović: École Polytechnique Fédérale de Lausanne; Swiss Finance Institute
Paul Schneider: University of Lugano - Institute of Finance; Swiss Finance Institute

No 24-42, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: In this short note, we study conditional linear factor models in the context of asset pricing panels. Our analysis focuses on conditional means and covariances to characterize the cross-sectional and inter-temporal properties of returns and factors as well as their interrelationships. We also review the conditions outlined in Kozak and Nagel (2024) and show how the conditional mean-variance efficient portfolio of an unbalanced panel can be spanned by low-dimensional factor portfolios, even without assuming invertibility of the conditional covariance matrices. Our analysis provides a comprehensive foundation for the specification and estimation of conditional linear factor models.

Keywords: asset pricing; factor models; characteristics; covariances; meanvariance efficient portfolio; stochastic discount factor; covariance estimation (search for similar items in EconPapers)
JEL-codes: C38 G11 G12 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2024-08
New Economics Papers: this item is included in nep-ecm
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2442

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