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Taming the Factor Zoo: A Test of New Factors
Author(s) -
FENG GUANHAO,
GIGLIO STEFANO,
XIU DACHENG
Publication year - 2020
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12883
Subject(s) - selection (genetic algorithm) , explanatory power , set (abstract data type) , econometrics , computer science , test (biology) , factor (programming language) , capital asset pricing model , model selection , asset (computer security) , economics , artificial intelligence , computer security , paleontology , philosophy , epistemology , biology , programming language
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.