One Factor to Bind the Cross-Section of Returns

Nicola Borri, Denis Chetverikov, Yukun Liu and Aleh Tsyvinski

Papers from arXiv.org

Abstract: We propose a new non-linear single-factor asset pricing model $r_{it}=h(f_{t}\lambda_{i})+\epsilon_{it}$. Despite its parsimony, this model represents exactly any non-linear model with an arbitrary number of factors and loadings -- a consequence of the Kolmogorov-Arnold representation theorem. It features only one pricing component $h(f_{t}\lambda_{I})$, 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.

Date: 2024-04
New Economics Papers: this item is included in nep-fmk
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http://arxiv.org/pdf/2404.08129 Latest version (application/pdf)

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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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2404.08129

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