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A Test for the Number of Factors in an Approximate Factor ModelRobert A. KorajczykNorthwestern University - Kellogg School of Management Gregory ConnorLondon School of Economics & Political Science (LSE) - Department of Accounting and Finance May 1993 Journal of Finance, Vol. 48, pp. 1263-1291, September 1993 Abstract: An important issue in applications of multifactor models of asset returns is the appropriate number of factors. Most extant tests for the number of factors are valid only for strict factor models, in which diversifiable returns are uncorrelated across assets. In this paper we develop a test statistic to determine the number of factors in an approximate factor model of asset returns, which does not require that diversifiable components of returns be uncorrelated across assets. We find evidence for one to six pervasive factors in the cross-section of New York Stock Exchange and American Stock Exchange stock returns.
Number of Pages in PDF File: 47 Keywords: Factor Models, Principal Components JEL Classification: G1, G12, C3, C33 Accepted Paper SeriesDate posted: January 24, 2007 ; Last revised: August 21, 2009Suggested CitationContact Information
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