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Financial factors selection with knockoffs: fund replication, explanatory and prediction networks

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  • Damien Challet

    (MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec - Université Paris-Saclay)

  • Christian Bongiorno

    (MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec - Université Paris-Saclay)

  • Guillaume Pelletier

    (BNP-Paribas)

Abstract

We apply the knockoff procedure to factor selection in finance. By building fake but realistic factors, this procedure makes it possible to control the fraction of false discovery in a given set of factors. To show its versatility, we apply it to fund replication and to the inference of explanatory and prediction networks.

Suggested Citation

  • Damien Challet & Christian Bongiorno & Guillaume Pelletier, 2021. "Financial factors selection with knockoffs: fund replication, explanatory and prediction networks," Post-Print hal-03165842, HAL.
    • Handle: RePEc:hal:journl:hal-03165842
    DOI: 10.1016/j.physa.2021.126105
    Note: View the original document on HAL open archive server: https://centralesupelec.hal.science/hal-03165842
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    References listed on IDEAS

    as
    1. Christian Bongiorno & Damien Challet, 2021. "Covariance matrix filtering with bootstrapped hierarchies," PLOS ONE, Public Library of Science, vol. 16(1), pages 1-13, January.
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    3. Yingying Fan & Jinchi Lv & Mahrad Sharifvaghefi & Yoshimasa Uematsu, 2020. "IPAD: Stable Interpretable Forecasting with Knockoffs Inference," Journal of the American Statistical Association, Taylor & Francis Journals, vol. 115(532), pages 1822-1834, December.
    4. Michele Tumminello & Salvatore Miccichè & Fabrizio Lillo & Jyrki Piilo & Rosario N Mantegna, 2011. "Statistically Validated Networks in Bipartite Complex Systems," PLOS ONE, Public Library of Science, vol. 6(3), pages 1-11, March.
    5. Emmanuel Candès & Yingying Fan & Lucas Janson & Jinchi Lv, 2018. "Panning for gold: ‘model‐X’ knockoffs for high dimensional controlled variable selection," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 80(3), pages 551-577, June.
    6. Fama, Eugene F. & French, Kenneth R., 2015. "A five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 116(1), pages 1-22.
    7. Damien Challet & R'emy Chicheportiche & Mehdi Lallouache & Serge Kassibrakis, 2016. "Statistically validated lead-lag networks and inventory prediction in the foreign exchange market," Papers 1609.04640, arXiv.org, revised Jul 2018.
    8. 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.
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