In Search of Statistically Valid Risk Factors

20 Pages Posted: 16 Dec 2012 Last revised: 4 Aug 2014

See all articles by Robert M. Anderson

Robert M. Anderson

University of California, Berkeley - Department of Economics

Stephen Bianchi

University of California, Berkeley

Lisa R. Goldberg

University of California, Berkeley; Aperio Group

Date Written: August 3, 2014

Abstract

An influential observation has the potential to render a model unsuitable for estimation with an OLS regression. This is well known in the statistics literature. However, the use of standard measures for detecting and managing influential observations is not common practice in empirical finance. In this article, we examine a leverage point, which is an outlier in an independent variable, from an economic perspective since it represents an actual market event. It is also interesting and subtle from a statistical perspective: it materially deflates the volume of regression confidence ellipsoids but has a limited effect on the regression coefficients, thereby enabling pure noise to masquerade as statistical significance.

Keywords: Factor volatility, variance, statistical significance, leverage point, beta, OLS regression, median regression, t-statistic, incremental explanatory power, outlier, VIX, FVIX

JEL Classification: G12, G11, C51, C52, C53, C12, C13

Suggested Citation

Anderson, Robert M. and Bianchi, Stephen and Goldberg, Lisa R., In Search of Statistically Valid Risk Factors (August 3, 2014). Available at SSRN: https://ssrn.com/abstract=2189866 or http://dx.doi.org/10.2139/ssrn.2189866

Robert M. Anderson

University of California, Berkeley - Department of Economics ( email )

530 Evans Hall #3880
Berkeley, CA 94720-3880
United States

Stephen Bianchi

University of California, Berkeley ( email )

530 Evans Hall
MC #3880
Berkeley, CA 94720
United States

Lisa R. Goldberg (Contact Author)

University of California, Berkeley ( email )

Department of Statistics
367 Evans Hall
Berkeley, CA 94720-3860
United States

Aperio Group ( email )

3 Harbor Drive
Suite 315
Sausalito, CA 94965
United States

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