Higher-Order Asset Pricing Factors via Forward Selection Fama-MacBeth Regression
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arXiv
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| Hauptverfasser: | , , , |
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| Format: | Preprint |
| Veröffentlicht: |
2025
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| _version_ | 1866908907539005440 |
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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 show that the higher-order terms and interactions of the common sparse linear factors are significantly priced in the cross-section of equity returns. A higher-order model with only a small number of selected higher-order terms from six widely used factors outperforms traditional benchmarks both in-sample and out-of-sample. It also substantially reduces the alphas of the extensive factor zoo, suggesting that the pricing power of many zoo factors is attributable to their exposure to higher-order terms of common linear factors. We identify and rank the most relevant higher-order terms by developing a forward selection Fama-MacBeth procedure. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2503_23501 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | Higher-Order Asset Pricing Factors via Forward Selection Fama-MacBeth Regression Borri, Nicola Chetverikov, Denis Liu, Yukun Tsyvinski, Aleh Econometrics 62F10 We show that the higher-order terms and interactions of the common sparse linear factors are significantly priced in the cross-section of equity returns. A higher-order model with only a small number of selected higher-order terms from six widely used factors outperforms traditional benchmarks both in-sample and out-of-sample. It also substantially reduces the alphas of the extensive factor zoo, suggesting that the pricing power of many zoo factors is attributable to their exposure to higher-order terms of common linear factors. We identify and rank the most relevant higher-order terms by developing a forward selection Fama-MacBeth procedure. |
| title | Higher-Order Asset Pricing Factors via Forward Selection Fama-MacBeth Regression |
| topic | Econometrics 62F10 |
| url | https://arxiv.org/abs/2503.23501 |