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Searching the Factor Zoo

Author

Listed:
  • Soosung Hwang

    (College of Economics, Sungkyunkwan University, Seoul, Korea)

  • Alexandre Rubesam

    (IESEG School of Management (LEM-CNRS-UMR 9221))

Abstract

Hundreds of factors have been proposed to explain asset returns during the past two decades, a situation which Cochrane (2011) has dubbed “a zoo of new factors”. In this paper, we develop a Bayesian approach to explore the space of possible linear factor models in the “zoo”. We conduct an extensive search for promising models using a set of 83 candidate factors based on the literature and applying the methodology to thousands of individual stocks. Despite the large number of factors that have been proposed, our results show that (i) only a handful of factors appear to explain the returns on individual stocks; (ii) from these, the only factor that is consistently selected over time is the market excess return; and (iii) other factors which are selected during certain periods are not those in widely used multi-factor models.

Suggested Citation

  • Soosung Hwang & Alexandre Rubesam, 2018. "Searching the Factor Zoo," Working Papers 2018-ACF-03, IESEG School of Management.
    • Handle: RePEc:ies:wpaper:f201803
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    File URL: https://www.ieseg.fr/wp-content/uploads/2012/03/2018-ACF-03_Rubesam-1.pdf
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    Cited by:

    1. Oehler, Andreas & Horn, Matthias & Wendt, Stefan, 2020. "Information Illusion: Placebic Information and Stock Price Estimates," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224575, Verein für Socialpolitik / German Economic Association.

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