Searching the Factor Zoo

Soosung Hwang () and Alexandre Rubesam

No 2018-ACF-03, Working Papers from IESEG School of Management

Abstract: Hundreds of factors have been proposed to explain asset returns during the past two decades, a situation which Cochrane (2011) has dubbed “a zoo of new factors”. In this paper, we develop a Bayesian approach to explore the space of possible linear factor models in the “zoo”. We conduct an extensive search for promising models using a set of 83 candidate factors based on the literature and applying the methodology to thousands of individual stocks. Despite the large number of factors that have been proposed, our results show that (i) only a handful of factors appear to explain the returns on individual stocks; (ii) from these, the only factor that is consistently selected over time is the market excess return; and (iii) other factors which are selected during certain periods are not those in widely used multi-factor models.

Keywords: Factor selection; Bayesian variable selection; Seemingly Unrelated Regressions (search for similar items in EconPapers)
Pages: 55 pages
Date: 2018-03
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ies:wpaper:f201803

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