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Multifactor asset pricing with a large number of observable risk factors and unobservable common and group-specific factors

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  • Bai, Jushan
  • Ando, Tomohiro

Abstract

This paper analyzes multifactor models in the presence of a large number of potential observable risk factors and unobservable common and group-specific pervasive factors. We show how relevant observable factors can be found from a large given set and how to determine the number of common and group-specific unobservable factors. The method allows consistent estimation of the beta coefficients in the presence of correlations between the observable and unobservable factors. The theory and method are applied to the study of asset returns for A-shares/B-shares traded on the Shanghai and Shenzhen stock exchanges, and to the study of risk prices in the cross section of returns.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 52785.

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Date of creation: 04 Jul 2013
Date of revision: Dec 2013
Handle: RePEc:pra:mprapa:52785

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Keywords: factor models; panel data analysis; penalized method; LASSO; SCAD; heterogenous coefficients;

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