Journal of Finance Vol. 75 No. 3 2020
Taming the Factor Zoo: A Test of New Factors
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 accounts for model selection mistakes that produce a bias due to omitted variables, unlike standard approaches that assume perfect variable selection. We apply our procedure to a set of factors recently discovered in the literature. While most of these new factors are shown to be redundant relative to the existing factors, a few have statistically significant explanatory power beyond the hundreds of factors proposed in the past.
- DOI
- 10.1111/jofi.12883
- Volume
- 75
- Issue
- 3
- Pages
- 1327-1370
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref