Time Series Variation in the Factor Zoo

74 Pages Posted: 21 Jan 2022 Last revised: 25 Jul 2023

See all articles by Hendrik Bessembinder

Hendrik Bessembinder

W.P. Carey School of Business

Aaron Burt

University of Oklahoma - Division of Finance

Christopher M. Hrdlicka

University of Washington - Michael G. Foster School of Business

Date Written: July 22, 2023

Abstract

The ability of three- to six-factor models to explain the cross-section of stock returns varies substantially over time, providing scope for time-varying numbers of additional factors. We show that additional factors are relevant and non-redundant, as out-of-sample Sharpe ratios formed from principal components of factors identified in-sample are economically substantive and continue to increase up to more than twenty factor principal components. The numbers of significant factors are strongly related to variation in economic conditions and measures of diversity in firm characteristics. These results suggest that time variation in the number of significant factors reflects time-varying economic complexity.

Keywords: Asset Pricing, Factors, Complexity, Time series variation, Diversity

JEL Classification: G10, G11, G12

Suggested Citation

Bessembinder, Hendrik (Hank) and Burt, Aaron Paul and Hrdlicka, Christopher M., Time Series Variation in the Factor Zoo (July 22, 2023). Available at SSRN: https://ssrn.com/abstract=3992041 or http://dx.doi.org/10.2139/ssrn.3992041

Hendrik (Hank) Bessembinder (Contact Author)

W.P. Carey School of Business ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

HOME PAGE: http://isearch.asu.edu/profile/2717225

Aaron Paul Burt

University of Oklahoma - Division of Finance ( email )

Norman, OK 73019
United States

HOME PAGE: http://sites.google.com/sites/aaronburt

Christopher M. Hrdlicka

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195
United States
206.616.0332 (Phone)
206.542.7472 (Fax)

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