Taming the Factor Zoo: A Test of New Factors

45 Pages Posted: 30 Jan 2019 Last revised: 14 Feb 2022

See all articles by Guanhao Feng

Guanhao Feng

City University of Hong Kong (CityU)

Stefano Giglio

Yale School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Dacheng Xiu

University of Chicago - Booth School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: January 2019

Abstract

We propose a model-selection method to systematically evaluate the contribution to asset pricing of any new factor, above and beyond what a high-dimensional set of existing factors explains. Our methodology explicitly accounts for potential model-selection mistakes, unlike the standard approaches that assume perfect variable selection, which rarely occurs in practice and produces a bias due to the omitted variables. We apply our procedure to a set of factors recently discovered in the literature. While most of these new factors are found to be redundant relative to the existing factors, a few — such as profitability — have statistically significant explanatory power beyond the hundreds of factors proposed in the past. In addition, we show that our estimates and their significance are stable, whereas the model selected by simple LASSO is not.

Suggested Citation

Feng, Guanhao and Giglio, Stefano and Xiu, Dacheng, Taming the Factor Zoo: A Test of New Factors (January 2019). NBER Working Paper No. w25481, Available at SSRN: https://ssrn.com/abstract=3324062

Guanhao Feng (Contact Author)

City University of Hong Kong (CityU) ( email )

83 Tat Chee Avenue
Kowloon Tong
Hong Kong

Stefano Giglio

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Dacheng Xiu

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
56
Abstract Views
767
rank
495,069
PlumX Metrics