Factor models with many assets: strong factors, weak factors, and the two-pass procedure

Result code in IS VaVaI
<a href="https://www.isvavai.cz/riv?ss=detail&h=RIV%2F67985998%3A_____%2F22%3A00568748" target="_blank" >RIV/67985998:_____/22:00568748 - isvavai.cz</a>
Alternative codes found
RIV/00216208:11640/22:00557297
Result on the web
<a href="https://doi.org/10.1016/j.jeconom.2021.01.002" target="_blank" >https://doi.org/10.1016/j.jeconom.2021.01.002</a>
DOI - Digital Object Identifier
<a href="http://dx.doi.org/10.1016/j.jeconom.2021.01.002" target="_blank" >10.1016/j.jeconom.2021.01.002</a>

Result language
angličtina
Original language name
Factor models with many assets: strong factors, weak factors, and the two-pass procedure
Original language description
This paper re-examines the problem of estimating risk premia in unconditional linear factor pricing models. Typically, the data used in the empirical literature are characterized by weakness of some pricing factors, strong cross-sectional dependence in the errors, and (moderately) high cross-sectional dimensionality. Using an asymptotic framework where the number of assets/portfolios grows with the time span of the data while the risk exposures of weak factors are local-to-zero, we show that the conventional two-pass estimation procedure delivers inconsistent estimates of the risk premia. We propose a new estimation procedure based on sample-splitting instrumental variables regression. The proposed estimator of risk premia is robust to weak included factors and to the presence of strong unaccounted cross-sectional error dependence. We prove the consistency of the new estimator, establish asymptotically valid inferences using Wald statistics, verify performance of the new procedure in simulations, and revisit some empirical studies.
Czech name
—
Czech description
—

Type
J<sub>imp</sub> - Article in a specialist periodical, which is included in the Web of Science database
CEP classification
—
OECD FORD branch
50202 - Applied Economics, Econometrics

Project
Result was created during the realization of more than one project. More information in the Projects tab.
Continuities
I - Institucionalni podpora na dlouhodoby koncepcni rozvoj vyzkumne organizace

Publication year
2022
Confidentiality
S - Úplné a pravdivé údaje o projektu nepodléhají ochraně podle zvláštních právních předpisů

Similar results(10)