One Factor to Bind the Cross-Section of Returns
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arXiv
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| Hauptverfasser: | , , , |
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| Format: | Preprint |
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2024
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| _version_ | 1866911837366255616 |
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| author | Borri, Nicola Chetverikov, Denis Liu, Yukun Tsyvinski, Aleh |
| author_facet | Borri, Nicola Chetverikov, Denis Liu, Yukun Tsyvinski, Aleh |
| contents | We propose a new non-linear single-factor asset pricing model $r_{it}=h(f_{t}λ_{i})+ε_{it}$. Despite its parsimony, this model represents exactly any non-linear model with an arbitrary number of factors and loadings -- a consequence of the Kolmogorov-Arnold representation theorem. It features only one pricing component $h(f_{t}λ_{I})$, comprising a nonparametric link function of the time-dependent factor and factor loading that we jointly estimate with sieve-based estimators. Using 171 assets across major classes, our model delivers superior cross-sectional performance with a low-dimensional approximation of the link function. Most known finance and macro factors become insignificant controlling for our single-factor. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2404_08129 |
| institution | arXiv |
| publishDate | 2024 |
| record_format | arxiv |
| spellingShingle | One Factor to Bind the Cross-Section of Returns Borri, Nicola Chetverikov, Denis Liu, Yukun Tsyvinski, Aleh General Finance Econometrics We propose a new non-linear single-factor asset pricing model $r_{it}=h(f_{t}λ_{i})+ε_{it}$. Despite its parsimony, this model represents exactly any non-linear model with an arbitrary number of factors and loadings -- a consequence of the Kolmogorov-Arnold representation theorem. It features only one pricing component $h(f_{t}λ_{I})$, comprising a nonparametric link function of the time-dependent factor and factor loading that we jointly estimate with sieve-based estimators. Using 171 assets across major classes, our model delivers superior cross-sectional performance with a low-dimensional approximation of the link function. Most known finance and macro factors become insignificant controlling for our single-factor. |
| title | One Factor to Bind the Cross-Section of Returns |
| topic | General Finance Econometrics |
| url | https://arxiv.org/abs/2404.08129 |