2020
DOI: 10.2139/ssrn.3691331
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Risk Factor Centrality and the Cross-Section of Expected Returns

Abstract: The Factor Zoo phenomenon calls for answers as to which risk factors are in fact capable of providing independent information on the cross-section of expected excess returns, while considering that asset-pricing literature has produced hundreds of candidates. In this paper, we propose a new methodology to reduce risk factor predictor dimensions by selecting the key component (most central element) of their precision matrix. Our approach yields a significant shrinkage in the original set of risk factors, enable… Show more

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References 130 publications
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