IDEAS home Printed from https://ideas.repec.org/p/arx/papers/1804.08472.html
   My bibliography  Save this paper

High-Dimensional Estimation, Basis Assets, and the Adaptive Multi-Factor Model

Author

Listed:
  • Liao Zhu
  • Sumanta Basu
  • Robert A. Jarrow
  • Martin T. Wells

Abstract

The paper proposes a new algorithm for the high-dimensional financial data -- the Groupwise Interpretable Basis Selection (GIBS) algorithm, to estimate a new Adaptive Multi-Factor (AMF) asset pricing model, implied by the recently developed Generalized Arbitrage Pricing Theory, which relaxes the convention that the number of risk-factors is small. We first obtain an adaptive collection of basis assets and then simultaneously test which basis assets correspond to which securities, using high-dimensional methods. The AMF model, along with the GIBS algorithm, is shown to have a significantly better fitting and prediction power than the Fama-French 5-factor model.

Suggested Citation

  • Liao Zhu & Sumanta Basu & Robert A. Jarrow & Martin T. Wells, 2018. "High-Dimensional Estimation, Basis Assets, and the Adaptive Multi-Factor Model," Papers 1804.08472, arXiv.org, revised Dec 2021.
    • Handle: RePEc:arx:papers:1804.08472
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/1804.08472
    File Function: Latest version
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Stephen A. Ross, 2013. "The Arbitrage Theory of Capital Asset Pricing," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 1, pages 11-30, World Scientific Publishing Co. Pte. Ltd..
    3. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-887, September.
    4. Fama, Eugene F. & French, Kenneth R., 2015. "A five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 116(1), pages 1-22.
    5. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    6. Ravi Jagannathan & Ernst Schaumburg & Guofu Zhou, 2010. "Cross-Sectional Asset Pricing Tests," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 49-74, December.
    7. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    8. Friedman, Jerome H. & Hastie, Trevor & Tibshirani, Rob, 2010. "Regularization Paths for Generalized Linear Models via Coordinate Descent," Journal of Statistical Software, Foundation for Open Access Statistics, vol. 33(i01).
    9. Simon, Noah & Friedman, Jerome H. & Hastie, Trevor & Tibshirani, Rob, 2011. "Regularization Paths for Cox's Proportional Hazards Model via Coordinate Descent," Journal of Statistical Software, Foundation for Open Access Statistics, vol. 39(i05).
    10. Bien, Jacob & Tibshirani, Robert, 2011. "Hierarchical Clustering With Prototypes via Minimax Linkage," Journal of the American Statistical Association, American Statistical Association, vol. 106(495), pages 1075-1084.
    11. Robert Tibshirani & Jacob Bien & Jerome Friedman & Trevor Hastie & Noah Simon & Jonathan Taylor & Ryan J. Tibshirani, 2012. "Strong rules for discarding predictors in lasso‐type problems," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 74(2), pages 245-266, March.
    12. Ryan J. Tibshirani & Jonathan Taylor & Richard Lockhart & Robert Tibshirani, 2016. "Exact Post-Selection Inference for Sequential Regression Procedures," Journal of the American Statistical Association, Taylor & Francis Journals, vol. 111(514), pages 600-620, April.
    13. John D. Storey, 2002. "A direct approach to false discovery rates," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 64(3), pages 479-498, August.
    14. Cun-Hui Zhang & Stephanie S. Zhang, 2014. "Confidence intervals for low dimensional parameters in high dimensional linear models," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 76(1), pages 217-242, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Liao Zhu & Haoxuan Wu & Martin T. Wells, 2021. "A News-based Machine Learning Model for Adaptive Asset Pricing," Papers 2106.07103, arXiv.org.
    2. Liao Zhu, 2021. "The Adaptive Multi-Factor Model and the Financial Market," Papers 2107.14410, arXiv.org, revised Aug 2021.
    3. Liao Zhu & Ningning Sun & Martin T. Wells, 2021. "Clustering Structure of Microstructure Measures," Papers 2107.02283, arXiv.org, revised Dec 2021.
    4. Liao Zhu & Ningning Sun & Martin T. Wells, 2022. "Clustering Structure of Microstructure Measures," Applied Economics and Finance, Redfame publishing, vol. 9(1), pages 85-95, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Liao Zhu, 2021. "The Adaptive Multi-Factor Model and the Financial Market," Papers 2107.14410, arXiv.org, revised Aug 2021.
    2. Liao Zhu & Robert A. Jarrow & Martin T. Wells, 2021. "Time-Invariance Coefficients Tests with the Adaptive Multi-Factor Model," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 11(04), pages 1-30, December.
    3. Lu Zhang, 2017. "The Investment CAPM," European Financial Management, European Financial Management Association, vol. 23(4), pages 545-603, September.
    4. Lu Zhang, 2019. "Q-factors and Investment CAPM," NBER Working Papers 26538, National Bureau of Economic Research, Inc.
    5. Zura Kakushadze & Willie Yu, 2016. "Multifactor Risk Models and Heterotic CAPM," Papers 1602.04902, arXiv.org, revised Mar 2016.
    6. Amit Goyal, 2012. "Empirical cross-sectional asset pricing: a survey," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 26(1), pages 3-38, March.
    7. Rocciolo, Francesco & Gheno, Andrea & Brooks, Chris, 2022. "Explaining abnormal returns in stock markets: An alpha-neutral version of the CAPM," International Review of Financial Analysis, Elsevier, vol. 82(C).
    8. Alles Rodrigues, Alexandre & Casalin, Fabrizio, 2022. "Factor investing in Brazil: Diversifying across factor tilts and allocation strategies," Emerging Markets Review, Elsevier, vol. 52(C).
    9. Joachim Freyberger & Andreas Neuhierl & Michael Weber, 2020. "Dissecting Characteristics Nonparametrically," The Review of Financial Studies, Society for Financial Studies, vol. 33(5), pages 2326-2377.
    10. Şahin, Baki Cem & Danışoğlu, Seza, 2022. "Ambiguity and asset pricing: An empirical investigation for an emerging market," International Review of Financial Analysis, Elsevier, vol. 84(C).
    11. Silva, Thiago Christiano & Wilhelm, Paulo Victor Berri & Tabak, Benjamin Miranda, 2023. "The effect of interconnectivity on stock returns during the Global Financial Crisis," The North American Journal of Economics and Finance, Elsevier, vol. 67(C).
    12. Zura Kakushadze, 2015. "Heterotic Risk Models," Papers 1508.04883, arXiv.org, revised Jan 2016.
    13. Zura Kakushadze & Willie Yu, 2016. "Statistical Risk Models," Papers 1602.08070, arXiv.org, revised Jan 2017.
    14. Oghenovo A. Obrimah, 2023. "Underpricing of initial public offerings (IPOs) and the credibility of underwriters’ pricing services," SN Business & Economics, Springer, vol. 3(2), pages 1-33, February.
    15. Fahad Ali & RongRong He & YueXiang Jiang, 2018. "Size, Value and Business Cycle Variables. The Three-Factor Model and Future Economic Growth: Evidence from an Emerging Market," Economies, MDPI, vol. 6(1), pages 1-24, February.
    16. Johan Knif & James W. Kolari & Gregory Koutmos & Seppo Pynnönen, 2019. "Measuring the relative return contribution of risk factors," Journal of Asset Management, Palgrave Macmillan, vol. 20(4), pages 263-272, July.
    17. Stephen A. Gorman & Frank J. Fabozzi, 2021. "The ABC’s of the alternative risk premium: academic roots," Journal of Asset Management, Palgrave Macmillan, vol. 22(6), pages 405-436, October.
    18. Zhong, Angel, 2018. "Idiosyncratic volatility in the Australian equity market," Pacific-Basin Finance Journal, Elsevier, vol. 50(C), pages 105-125.
    19. repec:dau:papers:123456789/2514 is not listed on IDEAS
    20. Zura Kakushadze, 2014. "4-Factor Model for Overnight Returns," Papers 1410.5513, arXiv.org, revised Jun 2015.
    21. Linnenluecke, Martina K. & Chen, Xiaoyan & Ling, Xin & Smith, Tom & Zhu, Yushu, 2017. "Research in finance: A review of influential publications and a research agenda," Pacific-Basin Finance Journal, Elsevier, vol. 43(C), pages 188-199.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:1804.08472. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.