Searching the Factor Zoo

IÉSEG Working Paper Series 2018-ACF-03

51 Pages Posted: 12 Mar 2018 Last revised: 24 Mar 2019

See all articles by Soosung Hwang

Soosung Hwang

Sungkyunkwan University - Department of Economics

Alexandre Rubesam

IESEG School of Management; French National Center for Scientific Research (CNRS) - Lille Economie & Management (LEM) UMR 9221

Date Written: March 20, 2019

Abstract

We propose a Bayesian variable selection method to explore the space of possible factor models for alarge set of candidate factors identified in the asset pricing literature. Using thousands of individualstocks, we identify several parsimonious models which perform at least as well, and in some cases betterthan, widely used factor models such as those proposed by Fama and French (2015) and Hou, Xue andZhang (2015). We find that, in addition to the market return, factors that reflect investors’ behavioralbiases, market microstructure, and production-side risk, also matter to explain stock returns. The searchfor a single reduced-form model has limits in practice, as many combinations of characteristics-basedfactors achieve similar empirical performance.

Keywords: Multi-factor model, Factor zoo, Factor selection, Bayesian variable selection, SeeminglyUnrelated Regressions

JEL Classification: G12, C52

Suggested Citation

Hwang, Soosung and Rubesam, Alexandre, Searching the Factor Zoo (March 20, 2019). IÉSEG Working Paper Series 2018-ACF-03. Available at SSRN: https://ssrn.com/abstract=3100811 or http://dx.doi.org/10.2139/ssrn.3100811

Soosung Hwang

Sungkyunkwan University - Department of Economics ( email )

25-2 Sungkyunkwan-ro
Jongno-Gu
110-745 Seoul
+82 (0)2 760 0489 (Phone)
+82 (0)2 744 5717 (Fax)

Alexandre Rubesam (Contact Author)

IESEG School of Management ( email )

Socle de la Grande Arche
1 Parvis de la Defense
Puteaux, Paris 92800
France

French National Center for Scientific Research (CNRS) - Lille Economie & Management (LEM) UMR 9221 ( email )

Lille
France

Register to save articles to
your library

Register

Paper statistics

Downloads
482
Abstract Views
2,297
rank
58,099
PlumX Metrics