Guanhao Feng, Wei Lan, Hansheng Wang, Jun Zhang
arXiv 15 Jan 2026 · Econometrics · publishedManagement Science (2026)
arXiv:2601.10279 · PDF · DOI · OpenAlex · Extracted main text
The asset pricing literature emphasizes factor models that minimize pricing errors but overlooks unselected candidate factors that could enhance the performance of test assets. This paper proposes a framework for factor model selection and testing by (i) selecting the optimal model that spans the joint efficient frontier of test assets and all candidate factors, and (ii) testing pricing performance on both test assets and unselected candidate factors. Our framework updates a baseline model (e.g., CAPM) sequentially by adding or removing factors based on asset pricing tests. Ensuring model selection consistency, our framework utilizes the asset pricing duality: minimizing cross-sectionally unexplained pricing errors aligns with maximizing the Sharpe ratio of the selected factor model. Empirical evidence shows that workhorse factor models fail asset pricing tests, whereas our proposed 8-factor model is not rejected and exhibits robust out-of-sample performance.
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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 | Barillas, F. and J. Shanken (2017) Which alpha? | 0.956 | 8 | 4 | 88% |
| 2 | Barillas, F. and J. Shanken (2018) Comparing asset pricing models | 0.941 | 6 | 5 | 83% |
| 3 | Fama, E. F. and K. R. French (2018) Choosing factors | 0.928 | 5 | 5 | 80% |
| 4 | Pesaran, M. H. and T. Yamagata (2023) Testing for alpha in linear factor pricing models with a large number of securities | 0.894 | 7 | 5 | 71% |
| 5 | Feng, G., J. He, N. G. Polson, and J. Xu (2024) Deep learning in characteristics-sorted factor models self | 0.843 | 3 | 3 | 100% |
| 6 | Lettau, M. and M. Pelger (2020) Factors that fit the time series and cross-section of stock returns | 0.843 | 3 | 3 | 100% |
| 7 | Gibbons, M. R., S. A. Ross, and J. Shanken (1989) A test of the efficiency of a given portfolio | 0.811 | 4 | 2 | 100% |
| 8 | Fan, J., Y. Liao, and J. Yao (2015) Power enhancement in high-dimensional cross-sectional tests | 0.737 | 5 | 3 | 40% |
| 9 | Avramov, D., S. Cheng, L. Metzker, and S. Voigt (2023) Integrating factor models | 0.737 | 3 | 3 | 67% |
| 10 | Fama, E. F. and K. R. French (2015) A five-factor asset pricing model | 0.737 | 3 | 3 | 67% |
Showing the top 10 of 63 scored citations.