April 14, 2023
11:00
DOYEN22
Sicong (Allen) Li, London Business School
will give a presentation on
Asset-Pricing Factors with Economic Targets
Abstract:
We propose a method to estimate latent asset-pricing factors that incorporates economically motivated targets for both cross-sectional and time-series properties of the factors. Cross-sectional targets may capture the shape of loadings (monotonicity of expected returns across characteristic-sorted portfolios) or the pricing span of exogenous state variables (macroeconomic innovations or intermediary-based risk factors). Time-series targets may capture overall expected returns or mispricing relative to a benchmark reduced-form model. Using a large- scale set of assets, we show that these targets nudge risk factors to better span the pricing kernel, leading to substantially higher Sharpe ratios and lower pricing errors than conventional approaches.
PDF: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4344837