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Higher-Order Asset Pricing Factors via Forward Selection Fama-MacBeth Regression

Author

Listed:
  • Nicola Borri
  • Denis Chetverikov
  • Yukun Liu
  • Aleh Tsyvinski

Abstract

We show that the higher-order terms and interactions of the common sparse linear factors are significantly priced in the cross-section of equity returns. A higher-order model with only a small number of selected higher-order terms from six widely used factors outperforms traditional benchmarks both in-sample and out-of-sample. It also substantially reduces the alphas of the extensive factor zoo, suggesting that the pricing power of many zoo factors is attributable to their exposure to higher-order terms of common linear factors. We identify and rank the most relevant higher-order terms by developing a forward selection Fama-MacBeth procedure.

Suggested Citation

  • Nicola Borri & Denis Chetverikov & Yukun Liu & Aleh Tsyvinski, 2025. "Higher-Order Asset Pricing Factors via Forward Selection Fama-MacBeth Regression," Papers 2503.23501, arXiv.org, revised Mar 2026.
    • Handle: RePEc:arx:papers:2503.23501
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    File URL: http://arxiv.org/pdf/2503.23501
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