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Asset Pricing with a General Multifactor Structure

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  • Tomohiro Ando
  • Jushan Bai

Abstract

This article analyzes multifactor models in the presence of a large number ofpotential observable risk factors and unobservable common and group-specificfactors. We show how relevant observable factors can be found from a large givenset and how to determine the number of common and group-specific unobservablefactors. The method allows consistent estimation of the beta coefficients in thepresence of correlations between the observable and unobservable factors. Thetheory and method are applied to the study of asset returns for A-shares andB-shares traded on the Shanghai and Shenzhen stock exchanges, and to the studyof risk prices in the cross section of returns.

Suggested Citation

  • Tomohiro Ando & Jushan Bai, 2015. "Asset Pricing with a General Multifactor Structure," Journal of Financial Econometrics, Oxford University Press, vol. 13(3), pages 556-604.
    • Handle: RePEc:oup:jfinec:v:13:y:2015:i:3:p:556-604.
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbu026
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    References listed on IDEAS

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    1. Jianping Mei & Jose A. Scheinkman & Wei Xiong, 2009. "Speculative Trading and Stock Prices: Evidence from Chinese A-B Share Premia," Annals of Economics and Finance, Society for AEF, vol. 10(2), pages 225-255, November.
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    5. Ghysels, Eric, 2014. "Factor Analysis with Large Panels of Volatility Proxies," CEPR Discussion Papers 10034, C.E.P.R. Discussion Papers.
    6. Tomohiro Ando & Jushan Bai, 2016. "Panel Data Models with Grouped Factor Structure Under Unknown Group Membership," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(1), pages 163-191, January.
    7. Ayhan Kose, M. & Otrok, Christopher & Whiteman, Charles H., 2008. "Understanding the evolution of world business cycles," Journal of International Economics, Elsevier, vol. 75(1), pages 110-130, May.
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