Abstract

http://ssrn.com/abstract=1452864
 
 

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A Synthesis of Two Factor Estimation Methods


Gregory Connor


London School of Economics & Political Science (LSE) - Department of Accounting and Finance

Robert A. Korajczyk


Northwestern University - Kellogg School of Management

Robert T. Uhlaner


McKinsey & Co. Inc. - San Francisco Office

February 14, 2014


Abstract:     
Two-pass cross sectional regression (TPCSR) is frequently used in estimating factor risk premiums. Recent papers argue that the common practice of grouping assets into portfolios to reduce the errors-in-variables (EIV) problem leads to loss of efficiency and masks potential deviations from asset pricing models. One solution that allows the use of individual assets while overcoming the EIV problem is iterated TPCSR (ITPCSR). ITSCSR converges to a fixed point regardless of the initial factors chosen. ITPCSR is intimately linked to the asymptotic principal components (APC) method of estimating factors since the ITPCSR estimates are the APC estimates.

Number of Pages in PDF File: 42

Keywords: Cross-sectional regression, Factor model, Principal components, Errors in variables

JEL Classification: G1, G12, C3

working papers series


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Date posted: August 21, 2009 ; Last revised: February 15, 2014

Suggested Citation

Connor, Gregory and Korajczyk, Robert A. and Uhlaner, Robert T., A Synthesis of Two Factor Estimation Methods (February 14, 2014). Available at SSRN: http://ssrn.com/abstract=1452864 or http://dx.doi.org/10.2139/ssrn.1452864

Contact Information

Gregory Connor
London School of Economics & Political Science (LSE) - Department of Accounting and Finance ( email )
Houghton Street
London WC2A 2AE
United Kingdom
+44 702 955-6407 (Phone)
+44 702 955-7420 (Fax)
Robert A. Korajczyk (Contact Author)
Northwestern University - Kellogg School of Management ( email )
2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8336 (Phone)
847-491-5719 (Fax)
Robert T. Uhlaner
McKinsey & Co. Inc. - San Francisco Office ( email )
555 California Street
San Francisco, CA 94104
United States
425-981-0250 (Phone)
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