DP17225 Three Common Factors

Author(s): Elena Andreou, Patrick Gagliardini, Eric Ghysels, Mirco Rubin
Publication Date: April 2022
Keyword(s): factor zoo, portfolio sorting, Testing common factors
JEL(s): C22, C38, C53, C55, G10, G12
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17225

Hint: these are not the Fama-French 3 factors and they are not even spanned by the Fama-French 5 factors. More importantly, they feature superior out-of-sample pricing performance compared to standard asset pricing models. What is "common" about these factors? We identify the factor space common between individual stocks and sorted portfolios - neither affected by time-varying betas nor by the sorting characteristics.