A synthesis of two factor estimation methods

Gregory Connor, Robert A. Korajczyk*, Robert T. Uhlaner

*Corresponding author for this work

Research output: Contribution to journalArticle

1 Scopus citations

Abstract

Two-pass cross-sectional regression (TPCSR) is frequently used in estimating factor risk premia. Recent papers argue that the common practice of grouping assets into portfolios to reduce the errors-in-variables (EIV) problem leads to loss of efficiency and masks potential deviations from asset pricing models. One solution that allows the use of individual assets while overcoming the EIV problem is iterated TPCSR (ITPCSR). ITPCSR converges to a fixed point regardless of the initial factors chosen. ITPCSR is intimately linked to the asymptotic principal components (APC) method of estimating factors since the ITPCSR estimates are the APC estimates, up to a rotation.

Original languageEnglish (US)
Pages (from-to)825-842
Number of pages18
JournalJournal of Financial and Quantitative Analysis
Volume50
Issue number4
DOIs
StatePublished - Sep 28 2015

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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