Latent Factor Analysis in Short Panels

Alain-Philippe Fortin, Patrick Gagliardini and Olivier Scaillet

Papers from arXiv.org

Abstract: We develop a pseudo maximum likelihood method for latent factor analysis in short panels without imposing sphericity nor Gaussianity. We derive an asymptotically uniformly most powerful invariant test for the number of factors. On a large panel of monthly U.S. stock returns, we separate month after month systematic and idiosyncratic risks in short subperiods of bear vs. bull market. We observe an uptrend in the paths of total and idiosyncratic volatilities. The systematic risk explains a large part of the cross-sectional total variance in bear markets but is not driven by a single factor and not spanned by observed factors.

Date: 2023-06, Revised 2025-10
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Citations: View citations in EconPapers (1)

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http://arxiv.org/pdf/2306.14004 Latest version (application/pdf)

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Working Paper: Latent Factor Analysis in Short Panels (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2306.14004

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