Discussion paper

DP14266 Taming the Factor Zoo: A Test of New Factors

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.

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Citation

Feng, G, S Giglio and D Xiu (2020), ‘DP14266 Taming the Factor Zoo: A Test of New Factors‘, CEPR Discussion Paper No. 14266. CEPR Press, Paris & London. https://cepr.org/publications/dp14266