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One Factor to Bind the Cross-Section of Returns

Author

Listed:
  • Nicola Borri

    (Luiss University, Rome)

  • Denis Chetverikov

    (University of California, Los Angeles)

  • Yukun Liu

    (University of Rochester, Simon Business School)

  • Aleh Tsyvinski

    (Yale University)

Abstract
We propose a new non-linear single-factor asset pricing model. Despite its parsimony, this model represents exactly any non-linear model with an arbitrary number of factors and loadings Ð a consequence of the Kolmogorov-Arnold representation theorem. It features only one pricing component, comprising a nonparametric link function of the time-dependent factor and factor loading that we jointly estimate with sieve-based estimators. Using 171 assets across major classes, our model delivers superior cross-sectional performance with a low-dimensional approximation of the link function. Most known finance and macro factors become insignificant controlling for our single-factor.

Suggested Citation

  • Nicola Borri & Denis Chetverikov & Yukun Liu & Aleh Tsyvinski, 2024. "One Factor to Bind the Cross-Section of Returns," Cowles Foundation Discussion Papers 2386, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:2386
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    File URL: https://economics.yale.edu/sites/default/files/2024-04/d2386.pdf
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    References listed on IDEAS

    as
    1. Fama, Eugene F. & French, Kenneth R., 2015. "A five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 116(1), pages 1-22.
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    6. Roderick McDonald, 1962. "A general approach to nonlinear factor analysis," Psychometrika, Springer;The Psychometric Society, vol. 27(4), pages 397-415, December.
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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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