NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Dacheng Xiu

Booth School of Business
University of Chicago
5807 South Woodlaswn Avenue
Chicago, IL 60637

E-Mail: EmailAddress: hidden: you can email any NBER-related person as first underscore last at nber dot org
Institutional Affiliation: University of Chicago

NBER Working Papers and Publications

January 2019Taming the Factor Zoo: A Test of New Factors
with Guanhao Feng, Stefano Giglio: w25481
We propose a model-selection method to systematically evaluate the contribution to asset pricing of any new factor, above and beyond what a high-dimensional set of existing factors explains. Our methodology explicitly accounts for potential model-selection mistakes, unlike the standard approaches that assume perfect variable selection, which rarely occurs in practice and produces a bias due to the omitted variables. We apply our procedure to a set of factors recently discovered in the literature. While most of these new factors are found to be redundant relative to the existing factors, a few — such as profitability — have statistically significant explanatory power beyond the hundreds of factors proposed in the past. In addition, we show that our estimates and their significance are stabl...
December 2018Empirical Asset Pricing via Machine Learning
with Shihao Gu, Bryan Kelly: w25398
We synthesize the field of machine learning with the canonical problem of empirical asset pricing: measuring asset risk premia. In the familiar empirical setting of cross section and time series stock return prediction, we perform a comparative analysis of methods in the machine learning repertoire, including generalized linear models, dimension reduction, boosted regression trees, random forests, and neural networks. At the broadest level, we find that machine learning offers an improved description of expected return behavior relative to traditional forecasting methods. We identify the best performing methods (trees and neural networks) and trace their predictive gains to allowance of nonlinear predictor interactions that are missed by other methods. Lastly, we find that all methods agre...
June 2017Inference on Risk Premia in the Presence of Omitted Factors
with Stefano Giglio: w23527
We propose a three-pass method to estimate the risk premia of observable factors in a linear asset pricing model, which is valid even when the observed factors are just a subset of the true factors that drive asset prices or they are measured with error. We show that the risk premium of a factor can be identified in a linear factor model regardless of the rotation of the other control factors as long as they together span the space of true factors. Motivated by this rotation invariance result, our approach uses principal components to recover the factor space and combines the estimated principal components with each observed factor to obtain a consistent estimate of its risk premium. Our methodology also accounts for potential measurement error in the observed factors and detects when such...
September 2015Principal Component Analysis of High Frequency Data
with Yacine Aït-Sahalia: w21584
We develop the necessary methodology to conduct principal component analysis at high frequency. We construct estimators of realized eigenvalues, eigenvectors, and principal components and provide the asymptotic distribution of these estimators. Empirically, we study the high frequency covariance structure of the constituents of the S&P 100 Index using as little as one week of high frequency data at a time. The explanatory power of the high frequency principal components varies over time. During the recent financial crisis, the first principal component becomes increasingly dominant, explaining up to 60% of the variation on its own, while the second principal component drives the common variation of financial sector stocks.

Published: Yacine Aït-Sahalia & Dacheng Xiu, 2019. "Principal Component Analysis of High-Frequency Data," Journal of the American Statistical Association, vol 114(525), pages 287-303.

 
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