A0509
Title: Intrinsic factor risk premia
Authors: Alberto Quaini - Erasmus University of Rotterdam (Netherlands) [presenting]
Fabio Trojani - University of Geneva, University of Turin and SFI (Switzerland)
Ming Yuan - Columbia University (United States)
Abstract: Intrinsic factor risk premia are given by the negative factor covariance with the stochastic discount factor projection on the return space. They are well-defined whenever return Sharpe ratios are bounded and equal to zero for any factor uncorrelated with returns. A simple Oracle estimator of intrinsic factor risk premia, which produces reliable inference procedures, is introduced for asset pricing models, including models with factors that are weakly correlated with returns and which consistently selects intrinsically priced factors in finite samples. Using our methodology based on intrinsic risk premia, a broad family of asset pricing models is studied from the factor zoo. In this context, a small set of low-dimensional factor models are detected featuring well-identified factor risk premia and a similarly low degree of misspecification.
