Factor Zoo (.zip)
36 Pages Posted: 15 Nov 2023 Last revised: 21 Nov 2023
Date Written: October 18, 2023
The number of factors allegedly driving the cross-section of stock returns has grown steadily over time. We explore how much this ‘factor zoo’ can be compressed, focusing on explaining the available alpha rather than the covariance matrix of factor returns. Our findings indicate that about 15 factors are enough to span the entire factor zoo. This evidence suggests that many factors are redundant but also that merely using a handful of factors, as in common asset pricing models, is insufficient. While the selected factor styles remain persistent, the specific style representatives vary over time, underscoring the importance of continuous factor innovation.
Keywords: Factor zoo, factor model, factor investing, alpha, GRS test
JEL Classification: G12, G14, G15
Suggested Citation: Suggested Citation