Topic: On the Pricing Ability of Filtered Factors

Speaker: Cesare Robotti, Professor of Finance, Warwick Business School

Time: 10:00am-11:30am, Wednesday, December 24

Location: 4-101

Abstract:

Over the past few decades, a “zoo” of traded and nontraded factors has been proposed to explain crosssectional differences in expected returns for major asset classes. The largely disappointing pricing ability of these factors has led many researchers to conjecture that ignoring heterogeneity in the pricing of risk across frequencies could be one of the main drivers of poor factor performance. We revisit the results in recent studies that document striking pricing ability and cross-sectional explanatory power for filtered factors and show that robust evidence for the pricing of frequency-specific beta/covariance risk remains largely elusive. To this end, we propose a tailored statistical framework for cross-sectional asset pricing that includes frequency as a dimension of risk explicitly and with the right level of generality.