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SUN 4-3: Risk Factors
Time:
Sunday, 07/Dec/2025:
10:50am - 11:45am
Presentations
Semiparametric Conditional Factor Models in Asset Pricing
Qihui Chen 1 , Nikolai Roussanov2 , Xiaoliang Wang3
1 CUHK-Shenzhen; 2 The Wharton School; 3 HKUST Business School, Hong Kong S.A.R. (China)
We introduce a simple and tractable methodology for estimating semiparametric
conditional latent factor models. Our approach disentangles the roles of characteristics
in capturing factor betas of asset returns from “alpha.” We construct factors
by extracting principal components from Fama-MacBeth managed portfolios. Applying
this methodology to the cross-section of U.S. individual stock returns, we
find compelling evidence of substantial nonzero pricing errors, even though our factors
demonstrate superior performance in standard asset pricing tests. Unexplained
“arbitrage” portfolios earn high Sharpe ratios, which decline over time. Combining
factors with these orthogonal portfolios produces out-of-sample Sharpe ratios
exceeding 4.
