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Factor Zoo Shrinking?

April 5, 2023 • Posted in Equity Premium

How does the U.S. stock return factor zoo, corrected for data snooping bias, change over time? In their March 2023 draft paper entitled “Useful Factors Are Fewer Than You Think”, Bin Chen, Qiyang Yu and Guofu Zhou tackle this question by asking:

  • How many of 207 published factors remain significant after controlling for false discovery rate? In general, returns for each factor are for a portfolio that is each month long (short) subsamples stocks sorted on the factor with the highest (lowest) expected returns. 
  • How does the number of significant factors in rolling 20-year subsamples change over time? 
  • Taking into account factor redundancies, how many clusters of similar factors based on high return correlations (risk sources) are there?

In a supporting test, they compare pre-publication and post-publication factor performance. Using monthly returns for 207 published long-short factors applied to U.S. stocks during 1967 through 2021, they find that:

(more…)

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