Abstract

http://ssrn.com/abstract=2380144
 


 



A Performance Comparison of Large-n Factor Estimators


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

February 25, 2016


Abstract:     
We evaluate the performance of various methods for estimating factor returns in an approximate factor model. Differences across estimators are most pronounced when there is cross-sectional heteroskedasticity, or when cross-sectional sample sizes, n, are below 4,000 assets. Estimators incorporating either cross-sectional or time-series heteroskedasticity out-perform the other estimators when those types of heteroskedasticity are present. With both cross-sectional and time-series heteroskedasticity and an unbalanced panel, the methods of Connor and Korajczyk (1988) and Jones (2001) provide the most accurate factor return estimates. The estimator of Stock and Watson (1998) provides less accurate estimates than the other estimators for n less than 2,000 (for the first factor) or 4,000 (for higher-order factors).

Number of Pages in PDF File: 28

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: February 26, 2016

Suggested Citation

Chen, Zhuo and Connor, Gregory and Korajczyk, Robert A., A Performance Comparison of Large-n Factor Estimators (February 25, 2016). 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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