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A Protocol for Factor Identification

Pukthuanthong, Kuntara and Roll, Richard and Subrahmanyam, Avanidhar (2017) A Protocol for Factor Identification. Social Science Working Paper, 1431. California Institute of Technology , Pasadena, CA. (Unpublished)

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We propose a protocol for identifying genuine risk factors. The underlying premise is that a risk factor must be related to the covariance matrix of returns, must be priced in the cross-section of returns, and should yield a reward-to-risk ratio that is reasonable enough to be consistent with risk pricing. A market factor, a profitability factor, and traded versions of macroeconomic factors pass our protocol, but many characteristic-based factors do not. Several of the underlying characteristics, however, do command premiums in the cross-section.

Item Type:Report or Paper (Working Paper)
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EditorKarolyi, AndrewKarolyi-AUNSPECIFIED
Additional Information:For insightful and constructive comments, we thank two anonymous referees, Andrew Karolyi (the editor), Dave Berger, Michael Brennan, Stephen Brown, Daniel Carvalho, Eric de Bodt, Wayne Ferson, Stefano Gubellinni, Campbell Harvey, Yan Liu, Peter Pope, Stephen Ross, Eduardo Schwartz, Kenneth Singleton, Ivo Welch, Russ Wermers and seminar participants at the 2012 Inquire UK conference, the 2013 Southwestern Finance Association annual meeting, the 2013 UCLA Brown Bag Seminar, the 2013 Rotman ICPM Seminar, the 2013 Australian Finance Conference, the 2014 Asian Finance Association Conference in Bali, the 2016 Dauphine-Amundi Conference in Paris, the 2016 Behavioral Finance Conference at the University of Miami, the 2016 Q-Group Conference in Phoenix, and the 2017 UBS/Maryland Conference in New York. We owe a great debt of gratitude to Olivier Ledoit for generous and unstinting guidance. We are thankful for the financial support from Inquire UK, the Dauphine–Amundi Chair in Asset Management, the Rotman International Centre for Pension Management (ICPM) at the University of Toronto, and for the Q-Group’s 2016 Jack Treynor Award.
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Dauphine–Amundi Chair in Asset ManagementUNSPECIFIED
Rotman International Centre for Pension Management (ICPM)UNSPECIFIED
Series Name:Social Science Working Paper
Issue or Number:1431
Record Number:CaltechAUTHORS:20171128-144249809
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:83546
Deposited By: Jacquelyn Bussone
Deposited On:29 Nov 2017 00:18
Last Modified:03 Oct 2019 19:07

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