Navigating the Factor Zoo with Matthias Hanauer
Excess Returns
Analyzing Factor Compression in Finance
The speaker discusses their analysis of over 150 factors in a database to determine if they were truly independent. They employed a process of factor compression where they started with a factor that helped reduce the overall alpha the most, measured using the GRS statistic. This iterative process led to a three-factor model and ultimately to around 15 significant factors. They also highlight the difference in factor evaluation between using value weighted factors and equal weighted factors, noting that for the U.S., about 15 factors were significant according to the GRS statistic.
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