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Extracting Statistical Factors When Betas are Time-Varying

Author

Listed:
  • Patrick Gagliardini

    (USI Università della Svizzera italiana; Swiss Finance Institute)

  • Hao Ma

    (USI Università della Svizzera italiana; Swiss Finance Institute, Students)

Abstract

This paper deals with identification and inference on the unobservable conditional factor space and its dimension in large unbalanced panels of asset returns. The model specification is nonparametric regarding the way the loadings vary in time as functions of common shocks and individual characteristics. The number of active factors can also be time-varying as an effect of the changing macroeconomic environment. The method deploys Instrumental Variables (IV) which have full-rank covariation with the factor betas in the cross-section. It allows for a large dimension of the vector generating the conditioning information by machine learning techniques. In an empirical application, we infer the conditional factor space in the panel of monthly returns of individual stocks in the CRSP dataset between January 1971 and December 2017.

Suggested Citation

  • Patrick Gagliardini & Hao Ma, 2019. "Extracting Statistical Factors When Betas are Time-Varying," Swiss Finance Institute Research Paper Series 19-65, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1965
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    Cited by:

    1. Alain-Philippe Fortin & Patrick Gagliardini & O. Scaillet, 2022. "Eigenvalue tests for the number of latent factors in short panels," Swiss Finance Institute Research Paper Series 22-81, Swiss Finance Institute.
    2. Patrick Gagliardini & Elisa Ossola & O. Scaillet, 2019. "Estimation of Large Dimensional Conditional Factor Models in Finance," Swiss Finance Institute Research Paper Series 19-46, Swiss Finance Institute.

    More about this item

    Keywords

    Large Panel; Unobservable Factors; Conditioning Information; Instrumental Variables; Machine Learning; Post-Lasso; Artificial Neural Networks;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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