Taming the Factor Zoo : A Test of New Factors
Research output: Journal Publications and Reviews (RGC: 21, 22, 62) › 21_Publication in refereed journal › peer-review
Related Research Unit(s)
|Journal / Publication||The Journal of Finance|
|Online published||24 Jan 2020|
|Publication status||Published - Jun 2020|
|Link to Scopus||https://www.scopus.com/record/display.uri?eid=2-s2.0-85080139006&origin=recordpage|
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 accounts for model selection mistakes that produce a bias due to omitted variables, unlike standard approaches that assume perfect variable selection. We apply our procedure to a set of factors recently discovered in the literature. While most of these new factors are shown to be redundant relative to the existing factors, a few have statistically significant explanatory power beyond the hundreds of factors proposed in the past.