A Performance Comparison of Large-n Factor Estimators
We evaluate the performance of various methods for estimating factor returns in an approximate factor model. Differences across estimators are most pronounced when there is cross-sectional heteroskedasticity, or when cross-sectional sample sizes, n, are below 4,000 assets. Estimators incorporating either cross-sectional or time-series heteroskedasticity outperform the other estimators when those types of heteroskedasticity are present. The differences are most pronounced when the cross-sectional sample is small.
Chen, Zhuo, Gregory Connor and Robert Korajczyk. Forthcoming. A Performance Comparison of Large-n Factor Estimators. Review of Asset Pricing Studies. 8(1)