English

One Factor to Bind the Cross-Section of Returns

General Finance 2024-04-15 v1 Econometrics

Abstract

We propose a new non-linear single-factor asset pricing model rit=h(ftλi)+ϵitr_{it}=h(f_{t}\lambda_{i})+\epsilon_{it}. Despite its parsimony, this model represents exactly any non-linear model with an arbitrary number of factors and loadings -- a consequence of the Kolmogorov-Arnold representation theorem. It features only one pricing component h(ftλI)h(f_{t}\lambda_{I}), 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.

Cite

@article{arxiv.2404.08129,
  title  = {One Factor to Bind the Cross-Section of Returns},
  author = {Nicola Borri and Denis Chetverikov and Yukun Liu and Aleh Tsyvinski},
  journal= {arXiv preprint arXiv:2404.08129},
  year   = {2024}
}
R2 v1 2026-06-28T15:51:56.362Z