NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Guanhao Feng

City University of Hong Kong
83 Tat Chee Avenue
Kowloon Tong
Hong Kong

E-Mail: gavin.feng@cityu.edu.hk
Institutional Affiliation: City University of Hong Kong

NBER Working Papers and Publications

January 2019Taming the Factor Zoo: A Test of New Factors
with Stefano Giglio, Dacheng Xiu: w25481
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 explicitly accounts for potential model-selection mistakes, unlike the standard approaches that assume perfect variable selection, which rarely occurs in practice and produces a bias due to the omitted variables. We apply our procedure to a set of factors recently discovered in the literature. While most of these new factors are found to be redundant relative to the existing factors, a few — such as profitability — have statistically significant explanatory power beyond the hundreds of factors proposed in the past. In addition, we show that our estimates and their significance are stabl...
 
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