Taming the Factor Zoo: A Test of New Factors

Guanhao Feng (), Stefano Giglio and Dacheng Xiu

No 25481, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We propose a model-selection method to systematically evaluate the contribution to asset pricing of any new factor, above and beyond what a high-dimensional set of existing factors explains. Our methodology explicitly accounts for potential model-selection mistakes, unlike the standard approaches that assume perfect variable selection, which rarely occurs in practice and produces a bias due to the omitted variables. We apply our procedure to a set of factors recently discovered in the literature. While most of these new factors are found to be redundant relative to the existing factors, a few — such as profitability — have statistically significant explanatory power beyond the hundreds of factors proposed in the past. In addition, we show that our estimates and their significance are stable, whereas the model selected by simple LASSO is not.

JEL-codes: C01 C12 C23 C52 C55 C58 G00 G1 G10 G12 (search for similar items in EconPapers)
Date: 2019-01
New Economics Papers: this item is included in nep-ecm and nep-ets
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Citations: View citations in EconPapers (60)

Published as GUANHAO FENG & STEFANO GIGLIO & DACHENG XIU, 2020. "Taming the Factor Zoo: A Test of New Factors," The Journal of Finance, vol 75(3), pages 1327-1370.

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Journal Article: Taming the Factor Zoo: A Test of New Factors (2020)
Working Paper: Taming the Factor Zoo: A Test of New Factors (2020)
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