Abstract

http://ssrn.com/abstract=2380144
 


 



Small-Sample Properties of Factor-Mimicking Portfolio Estimates


Zhuo Chen


Tsinghua University - PBC School of Finance

Gregory Connor


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

Robert A. Korajczyk


Northwestern University - Kellogg School of Management

September 10, 2014


Abstract:     
This paper uses simulations to evaluate the performance of various methods for estimating factor returns in an approximate factor model when the cross sectional sample (n) is large relative to the time-series sample (T). We study the performance of the estimators under a variety of alternative specifications of the underlying factor structure. We find that 1) all of the estimators perform well, even when they do not accommodate the form of heteroskedasticity present in the data; 2) for the sample sizes considered here, accommodating heteroskedasticity does not deteriorate performance much when simple forms of heteroskedaticity are present; 3) estimators that handle missing data by substituting fitted returns from the factor model converge to the true factors more slowly than the other estimators.

Number of Pages in PDF File: 30

Keywords: Factor Model, Asymptotic Principal Components, Large-Scale Factor Model

JEL Classification: G1, G12, C15, C23

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Date posted: January 18, 2014 ; Last revised: September 11, 2014

Suggested Citation

Chen, Zhuo and Connor, Gregory and Korajczyk, Robert A., Small-Sample Properties of Factor-Mimicking Portfolio Estimates (September 10, 2014). Available at SSRN: http://ssrn.com/abstract=2380144 or http://dx.doi.org/10.2139/ssrn.2380144

Contact Information

Zhuo Chen
Tsinghua University - PBC School of Finance ( email )
43 Chengfu Road
Beijing, 100083
China
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)
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