A Protocol for Factor Identification

47 Pages Posted: 20 Oct 2013 Last revised: 19 Jun 2018

See all articles by Kuntara Pukthuanthong

Kuntara Pukthuanthong

University of Missouri, Columbia

Richard Roll

California Institute of Technology

Multiple version iconThere are 4 versions of this paper

Date Written: January 27, 2014

Abstract

Several hundred factor candidates have been suggested in the literature. We propose a protocol for determining which factor candidates are related to risks and which candidates are related to mean returns. Factor candidates could be related to both risk and returns, to neither, or to one but not the other.

A characteristic cannot be a factor. Time variation in both risk premiums and covariances is a challenge, but manageable with recently developed statistical procedures. We illustrate those techniques and also propose a new instrumental variables method to resolve the errors-in-variables problem in estimating factor exposures (betas) for individual assets.

Suggested Citation

Pukthuanthong, Kuntara and Roll, Richard W., A Protocol for Factor Identification (January 27, 2014). Available at SSRN: https://ssrn.com/abstract=2342624 or http://dx.doi.org/10.2139/ssrn.2342624

Kuntara Pukthuanthong (Contact Author)

University of Missouri, Columbia ( email )

Robert J. Trulaske, Sr. College of Business
403 Cornell Hall
Columbia, MO 65211
United States
6198076124 (Phone)

HOME PAGE: http://https://kuntara.weebly.com

Richard W. Roll

California Institute of Technology ( email )

1200 East California Blvd
Mail Code: 228-77
Pasadena, CA 91125
United States
626-395-3890 (Phone)
310-836-3532 (Fax)

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