Nicola Borri, Denis Chetverikov, Yukun Liu, Aleh Tsyvinski
arXiv 30 Mar 2025 · Econometrics · 3 citations (OpenAlex)
arXiv:2503.23501 · PDF · DOI · OpenAlex · Extracted main text
We show that the higher-orders and their interactions of the common sparse linear factors can effectively subsume the factor zoo. To this extend, we propose a forward selection Fama-MacBeth procedure as a method to estimate a high-dimensional stochastic discount factor model, isolating the most relevant higher-order factors. Applying this approach to terms derived from six widely used factors (the Fama-French five-factor model and the momentum factor), we show that the resulting higher-order model with only a small number of selected higher-order terms significantly outperforms traditional benchmarks both in-sample and out-of-sample. Moreover, it effectively subsumes a majority of the factors from the extensive factor zoo, suggesting that the pricing power of most zoo factors is attributable to their exposure to higher-order terms of common linear factors.
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The works this paper leans on most, across its whole bibliography — not restricted to papers in our corpus. Ranked by composite intensity, which combines how often a work is mentioned, how many sections mention it, and how much of that falls in the main text rather than the appendix.
| Reference | Intensity | Mentions | Sections | Main text | |
|---|---|---|---|---|---|
| 1 | Feng, Guanhao and Giglio, Stefano and Xiu, Dacheng (2020) Taming the factor zoo: A test of new factors | 1.000 | 12 | 4 | 100% |
| 2 | Jensen, Theis Ingerslev and Kelly, Bryan and Pedersen, Lasse Heje (2023) Is there a replication crisis in finance? | 1.000 | 10 | 4 | 100% |
| 3 | Chen, Andrew Y. and Zimmermann, Tom (2022) Open Source Cross-Sectional Asset Pricing | 1.000 | 7 | 3 | 100% |
| 4 | Elenberg, Ethan and Khanna, Rajiv and Dimakis, Alexandros and Negahb… (2018) Restricted strong convexity implies weak submodularity | 1.000 | 6 | 3 | 100% |
| 5 | Fama, Eugene F and French, Kenneth R (2015) A five-factor asset pricing model | 0.874 | 7 | 2 | 100% |
| 6 | Kozak, Serhiy and Nagel, Stefan and Santosh, Shrihari (2020) Shrinking the cross-section | 0.874 | 5 | 2 | 100% |
| 7 | Dittmar, Robert F (2002) Nonlinear pricing kernels, kurtosis preference, and evidence from the cross section of equity returns | 0.811 | 4 | 2 | 100% |
| 8 | Lewellen, Jonathan and Nagel, Stefan and Shanken, Jay (2010) A skeptical appraisal of asset pricing tests | 0.811 | 4 | 2 | 100% |
| 9 | Fama, Eugene F. and French, Kenneth R (1993) Common risk factors in the returns on stocks and bonds | 0.737 | 3 | 2 | 100% |
| 10 | Jegadeesh, Narasimhan and Titman, Sheridan (1993) Returns to buying winners and selling losers: Implications for stock market efficiency | 0.737 | 3 | 2 | 100% |
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