Interpretable Factors of Firm Characteristics

Yuxiao Jiao, Guofu Zhou, Wu Zhu and Yingzi Zhu

Papers from arXiv.org

Abstract: We develop a new framework for constructing factors from firm characteristics that balances statistical efficiency and economic interpretability. Instead of using all characteristics equally, our method groups related characteristics and derives one factor per group. The grouping combines economic intuition with data-driven clustering. Applied to the IPCA model by Kelly et al. (2019), our approach yields economically meaningful factors that match or exceed standard IPCA in pricing performance. Using 94 characteristics from Gu et al. (2020), we show that our parsimonious, transparent factors outperform benchmarks in out-of-sample tests, demonstrating the value of embedding economic structure into statistical modeling.

Date: 2025-08
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/2508.02253 Latest version (application/pdf)

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:arx:papers:2508.02253

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().