Small-Sample Properties of Factor-Mimicking Portfolio Estimates
Tsinghua University - PBC School of Finance
London School of Economics & Political Science (LSE) - Department of Accounting and Finance
Robert A. Korajczyk
Northwestern University - Kellogg School of Management
September 10, 2014
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, C23working papers series
Date posted: January 18, 2014 ; Last revised: September 11, 2014
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