Details

Autor(en) / Beteiligte

• Lettau, Martin
• Pelger, Markus
• Van Nieuwerburgh, Stijn

Titel

Factors That Fit the Time Series and Cross-Section of Stock Returns

Ist Teil von

• The Review of financial studies, 2020-05, Vol.33 (5), p.2274-2325

Ort / Verlag

Oxford University Press

Erscheinungsjahr

2020

Quelle

Business Source Ultimate【Trial: -2024/12/31】【Remote access available】

Beschreibungen/Notizen

• We propose a new method for estimating latent asset pricing factors that fit the time series and cross-section of expected returns. Our estimator generalizes principal component analysis (PCA) by including a penalty on the pricing error in expected returns. Our approach finds weak factors with high Sharpe ratios that PCA cannot detect. We discover five factors with economic meaning that explain well the cross-section and time series of characteristic-sorted portfolio returns. The out-of-sample maximum Sharpe ratio of our factors is twice as large as with PCA with substantially smaller pricing errors. Our factors imply that a significant amount of characteristic information is redundant.