The Journal of Finance

Taming the Factor Zoo: A Test of New Factors

Published: 01/24/2020   |   DOI: 10.1111/jofi.12883

GUANHAO FENG, STEFANO GIGLIO, DACHENG XIU

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 accounts for model selection mistakes that produce a bias due to omitted variables, unlike standard approaches that assume perfect variable selection. We apply our procedure to a set of factors recently discovered in the literature. While most of these new factors are shown to be redundant relative to the existing factors, a few have statistically significant explanatory power beyond the hundreds of factors proposed in the past.

Equity Term Structures without Dividend Strips Data

Published: 10/24/2024   |   DOI: 10.1111/jofi.13394

STEFANO GIGLIO, BRYAN KELLY, SERHIY KOZAK

We use a large cross section of equity returns to estimate a rich affine model of equity prices, dividends, returns, and their dynamics. Our model prices dividend strips of the market and equity portfolios without using strips data in the estimation. Yet model‐implied equity yields closely match yields on traded strips. Our model extends equity term‐structure data over time (to the 1970s) and across maturities, and generates term structures for various equity portfolios. The novel cross section of term structures from our model covers 45 years and includes several recessions, providing a novel set of empirical moments to discipline asset pricing models.