Spanning Latent and Observable Factors

53 Pages Posted: 8 Feb 2023

See all articles by Elena Andreou

Elena Andreou

University of Cyprus - Department of Economics

Patrick Gagliardini

University of Lugano; Swiss Finance Institute

Eric Ghysels

University of North Carolina Kenan-Flagler Business School; University of North Carolina (UNC) at Chapel Hill - Department of Economics

Mirco Rubin

EDHEC Business School

Date Written: February 5, 2023

Abstract

Factor analysis is a widely used tool to summarize high dimensional panel data via a small dimensional set of latent factors. Applications, particularly in finance, are often focused on observable factors with an economic interpretation. The objective of this paper is to provide a formal test for the question whether the factor spaces of latent and observable (economic) factors are equal. We derive asymptotic properties and propose a bootstrap version of the test which has improved small sample properties.

Keywords: Latent pervasive factors, Observable factors, Canonical correlations, Spanning, PCA

JEL Classification: C23, C38, C55, C12, E32

Suggested Citation

Andreou, Elena and Gagliardini, Patrick and Ghysels, Eric and Rubin, Mirco, Spanning Latent and Observable Factors (February 5, 2023). Available at SSRN: https://ssrn.com/abstract=4349003 or http://dx.doi.org/10.2139/ssrn.4349003

Elena Andreou

University of Cyprus - Department of Economics ( email )

75 Kallipoleos Street
P.O. Box 20537
1678 Nicosia
Cyprus
+357 2 892449 (Phone)
+357 2 892432 (Fax)

Patrick Gagliardini

University of Lugano ( email )

Via Buffi 13
Lugano, TN 6900
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Eric Ghysels (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Gardner Hall, CB 3305
Chapel Hill, NC 27599
United States
919-966-5325 (Phone)
919-966-4986 (Fax)

HOME PAGE: http://https://eghysels.web.unc.edu/

Mirco Rubin

EDHEC Business School ( email )

393 Promenade des Anglais
Nice, 06200
France

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