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.


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