IFin Seminar, Luca Pezzo, University of New Orleans - Characteristics-Based Factor Modeling via Reduced Rank Regression
Institute of Finance
Date: 30 November 2023 / 15:00 - 16:00
Speaker: Luca Pezzo, University of New Orleans
Title - Characteristics-Based Factor Modeling via Reduced Rank Regression
Date: November 30, 2023
Time: 15:00-16:00
Room: Virtual over Zoom
Abstract:
We provide a framework for extracting characteristics-based factors via Reduced Rank Regression. This generalizes the Instrumented Principal Component Analysis by Kelly et al. (2019), the Projected Principal Component Analysis in Fan et al. (2016b), can accommodate cross-sectional and time-series dependencies, and recovers the closest lower-dimensional approximation to GLS factors discussed in Kozak and Nagel (2023). The asymptotic theory is derived and a bias in the IPCA inference is corrected. A sparse design is introduced to interpret the factors. Our findings confirm that accounting for cross-sectional dependence results in more efficient estimators leading to a better fit and a higher spanning.
