Multifactor asset pricing with a large number of observable risk factors and unobservable common and group-specific factors

Jushan Bai and Tomohiro Ando

MPRA Paper from University Library of Munich, Germany

Abstract: This paper analyzes multifactor models in the presence of a large number of potential observable risk factors and unobservable common and group-specific pervasive factors. We show how relevant observable factors can be found from a large given set and how to determine the number of common and group-specific unobservable factors. The method allows consistent estimation of the beta coefficients in the presence of correlations between the observable and unobservable factors. The theory and method are applied to the study of asset returns for A-shares/B-shares traded on the Shanghai and Shenzhen stock exchanges, and to the study of risk prices in the cross section of returns.

Keywords: factor models; panel data analysis; penalized method; LASSO; SCAD; heterogenous coefficients (search for similar items in EconPapers)
JEL-codes: C31 C33 C52 G12 (search for similar items in EconPapers)
Date: 2013-07-04, Revised 2013-12
New Economics Papers: this item is included in nep-ecm
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:52785

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