Bayesian Solutions for the Factor Zoo: We Just Ran Two Quadrillion Models
Subject
Finance
Publishing details
Social Sciences Research Network
Authors / Editors
Bryzgalova S;Huang J;Julliard C
Biographies
Publication Year
2020
Abstract
We propose a novel framework for analyzing linear asset pricing models: simple, robust, and applicable to high dimensional problems. For a (potentially misspecified) standalone model, it provides reliable risk premia estimates of both tradable and non-tradable factors, and detects those weakly identified. For competing factors and (possibly non-nested) models, the method automatically selects the best specification – if a dominant one exists – or provides a model averaging, if there is no clear winner given the data. We analyze 2.25 quadrillion models generated by a large set of existing factors, and gain novel insights on the empirical drivers of asset returns.
Keywords
Cross-Sectional Asset Pricing; Factor Models; Model Evaluation; Multiple Testing; Data Mining; P-Hacking; Bayesian Methods; shrinkage; SDF
Series
Social Sciences Research Network
Available on ECCH
No
