Spectral factor models

Federico M. Bandi, Shomesh E. Chaudhuri, Andrew Lo () and Andrea Tamoni

Journal of Financial Economics, 2021, vol. 142, issue 1, 214-238

Abstract: We represent risk factors as sums of orthogonal components capturing fluctuations with cycles of different length. The representation leads to novel spectral factor models in which systematic risk is allowed—without being forced—to vary across frequencies. Frequency-specific systematic risk is captured by a notion of spectral beta. We show that traditional factor models restrict the spectral betas to be constant across frequencies. The restriction can hide horizon-specific pricing effects that spectral factor models are designed to reveal. We illustrate how the methods may lead to economically meaningful dimensionality reduction in the factor space.

Keywords: Systematic risk; Factor models; Frequency; Cross-sectional asset pricing (search for similar items in EconPapers)
JEL-codes: C22 C32 E32 G11 G12 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304405X21001549
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:142:y:2021:i:1:p:214-238

DOI: 10.1016/j.jfineco.2021.04.024

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().