Semiparametric Conditional Factor Models in Asset Pricing
Fuente:
arXiv
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| Autori principali: | , , |
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| Natura: | Preprint |
| Pubblicazione: |
2021
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| _version_ | 1866910919491059712 |
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| author | Chen, Qihui Roussanov, Nikolai Wang, Xiaoliang |
| author_facet | Chen, Qihui Roussanov, Nikolai Wang, Xiaoliang |
| contents | We introduce a simple and tractable methodology for estimating semiparametric conditional latent factor models. Our approach disentangles the roles of characteristics in capturing factor betas of asset returns from ``alpha.'' We construct factors by extracting principal components from Fama-MacBeth managed portfolios. Applying this methodology to the cross-section of U.S. individual stock returns, we find compelling evidence of substantial nonzero pricing errors, even though our factors demonstrate superior performance in standard asset pricing tests. Unexplained ``arbitrage'' portfolios earn high Sharpe ratios, which decline over time. Combining factors with these orthogonal portfolios produces out-of-sample Sharpe ratios exceeding 4. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2112_07121 |
| institution | arXiv |
| publishDate | 2021 |
| record_format | arxiv |
| spellingShingle | Semiparametric Conditional Factor Models in Asset Pricing Chen, Qihui Roussanov, Nikolai Wang, Xiaoliang Econometrics Statistics Theory We introduce a simple and tractable methodology for estimating semiparametric conditional latent factor models. Our approach disentangles the roles of characteristics in capturing factor betas of asset returns from ``alpha.'' We construct factors by extracting principal components from Fama-MacBeth managed portfolios. Applying this methodology to the cross-section of U.S. individual stock returns, we find compelling evidence of substantial nonzero pricing errors, even though our factors demonstrate superior performance in standard asset pricing tests. Unexplained ``arbitrage'' portfolios earn high Sharpe ratios, which decline over time. Combining factors with these orthogonal portfolios produces out-of-sample Sharpe ratios exceeding 4. |
| title | Semiparametric Conditional Factor Models in Asset Pricing |
| topic | Econometrics Statistics Theory |
| url | https://arxiv.org/abs/2112.07121 |