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Research Details
A Synthesis of Factor Estimation Methods, Journal of Financial and Quantitative Analysis
Abstract
Two-pass cross sectional regression (TPCSR) is frequently used in estimating factor risk premiums. 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). ITSCSR 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.
Type
Article
Author(s)
Gregory Connor, Robert Korajczyk, Robert Uhlaner
Date Published
2015
Citations
Connor, Gregory, Robert Korajczyk, and Robert Uhlaner. 2015. A Synthesis of Factor Estimation Methods. Journal of Financial and Quantitative Analysis. 50(4): 825-842.
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