One Factor to Bind the Cross-Section of Returns

71 Pages Posted: 16 Apr 2024

See all articles by Nicola Borri

Nicola Borri

LUISS University - Department of Economics and Finance

Denis Chetverikov

University of California, Los Angeles (UCLA) - Department of Economics

Yukun Liu

University of Rochester - Simon Business School

Aleh Tsyvinski

Yale University - Cowles Foundation; Yale University

Multiple version iconThere are 2 versions of this paper

Date Written: April 11, 2024

Abstract

We propose a new non-linear single-factor asset pricing model. Despite its parsimony, this model represents exactly any non-linear model with an arbitrary number of factors and loadings – a consequence of the Kolmogorov-Arnold representation theorem. It features only one pricing component, comprising a nonparametric link function of the time-dependent factor and factor loading that we jointly estimate with sieve-based estimators. Using 171 assets across major classes, our model delivers superior cross-sectional performance with a low-dimensional approximation of the link function. Most known finance and macro factors become insignificant controlling for our single-factor.

Keywords: asset returns, non-linear factor model, Kolmogorov-Arnold, factor zoo

JEL Classification: G10, G12, C10

Suggested Citation

Borri, Nicola and Chetverikov, Denis and Liu, Yukun and Tsyvinski, Aleh and Tsyvinski, Aleh, One Factor to Bind the Cross-Section of Returns (April 11, 2024). Available at SSRN: https://ssrn.com/abstract=4791496 or http://dx.doi.org/10.2139/ssrn.4791496

Nicola Borri (Contact Author)

LUISS University - Department of Economics and Finance ( email )

viale Romania, 32
Rome, 00197
Italy

HOME PAGE: http://docenti.luiss.it/borri/

Denis Chetverikov

University of California, Los Angeles (UCLA) - Department of Economics ( email )

8283 Bunche Hall
Los Angeles, CA 90095-1477
United States

Yukun Liu

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Aleh Tsyvinski

Yale University - Cowles Foundation ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States
203-432-9163 (Phone)

Yale University ( email )

493 College St
New Haven, CT CT 06520
United States

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