Fundamental properties of linear factor models
Statistical Finance
2025-02-04 v3 Applications
Abstract
We study conditional linear factor models in the context of asset pricing panels. Our analysis focuses on conditional means and covariances to characterize the cross-sectional and inter-temporal properties of returns and factors as well as their interrelationships. We also review the conditions outlined in Kozak and Nagel (2024) and show how the conditional mean-variance efficient portfolio of an unbalanced panel can be spanned by low-dimensional factor portfolios, even without assuming invertibility of the conditional covariance matrices. Our analysis provides a comprehensive foundation for the specification and estimation of conditional linear factor models.
Cite
@article{arxiv.2409.02521,
title = {Fundamental properties of linear factor models},
author = {Damir Filipovic and Paul Schneider},
journal= {arXiv preprint arXiv:2409.02521},
year = {2025}
}