Factors That Fit The Time Series and Cross-Section of Stock Returns

✩
Electronic copy available at: https://ssrn.com/abstract=3211106

2
Statistical Model F
=0.05
1
0.8
0.6
Corr
0.4
SR=0.6
0.2 SR=0.3
SR=0.1
SR=0
0
0 5 10 15 20 25 30 35 40
2
Statistical Model F
=0.1
1
0.8
0.6
Corr
0.4
SR=0.6
0.2 SR=0.3
SR=0.1
SR=0
0
0 5 10 15 20 25 30 35 40

0.3 0.3
0.2 0.2
0.1 0.1
0 5 10 15 20 25 30 0 5 10 15 20 25 30
0.25 0.25
0.2 0.2
0.15 0.15
0.1 0.1
0.05 0.05
0 5 10 15 20 25 30 0 5 10 15 20 25 30
1 factor
15 2 factors 15
3 factors
10 4 factors 10
5 factors
5 6 factors 5
0 5 10 15 20 25 30 0 5 10 15 20 25 30

Loadings of 1. RP-PCA Factor Loadings of 2. RP-PCA Factor Loadings of 3. RP-PCA Factor
1.5
0.1
0.3
low 1.5 1.5 1.4 1.3 1.1 low -0.4 -0.2 -0.0 0.1 0.3 low 0.0 -0.0 0.0 0.0 0.1
0.0
1.4
0.2
0.0
2 1.4 1.4 1.3 1.2 0.8 1.3 2 -0.4 -0.1 -0.0 0.1 0.4 2 0.1 0.1 0.1 0.1 0.1
0.1 -0.0
-0.1
1.2 0.0
accrual
accrual
accrual
3 1.4 1.3 1.2 1.1 0.8 3 -0.4 -0.2 -0.0 0.2 0.4 3 0.0 0.0 0.1 0.0 0.1 -0.2
-0.1 -0.2
1.1
-0.2
4 1.5 1.4 1.3 1.2 0.9 4 -0.4 -0.2 -0.0 0.1 0.3 -0.2 4 0.1 -0.0 0.0 0.1 -0.1
1.0
-0.3
-0.3
-0.4
0.9
high 1.4 1.4 1.3 1.3 0.9 high -0.4 -0.2 -0.0 0.1 0.3 high -0.2 -0.2 -0.3 -0.2 -0.4
-0.4 -0.4
2
4
l
g
al
al
al
bi
bi
bi
sm
sm
sm
size size size
Loadings of 1. PCA Factor Loadings of 2. PCA Factor Loadings of 3. PCA Factor
1.3
0.3
low 1.3 1.3 1.2 1.1 0.9 low -0.4 -0.2 -0.0 0.1 0.3 low 0.2 -0.0 -0.1 -0.1 0.2 0.2
1.2 0.2
0.2
2 1.2 1.1 1.0 1.0 0.7 2 -0.4 -0.1 -0.0 0.1 0.4 2 0.2 -0.0 -0.1 -0.1 0.2
0.1
1.1 0.1
0.0
accrual
accrual
accrual
0.0
3 1.1 1.1 1.0 0.9 0.7 1.0 3 -0.4 -0.2 -0.0 0.2 0.4 3 0.2 -0.0 -0.1 -0.1 0.1
-0.1
0.0
0.9
4 1.2 1.2 1.1 1.0 0.8 4 -0.4 -0.2 -0.0 0.1 0.3 -0.2 4 0.1 -0.1 -0.1 -0.1 0.0
-0.1
0.8
-0.3
-0.1
high 1.3 1.3 1.3 1.2 0.9 high -0.4 -0.2 -0.0 0.1 0.3 high 0.2 -0.1 -0.2 -0.1 -0.0
0.7 -0.4
-0.2
2
4
l
g
al
al
al
bi
bi
bi
sm
sm
sm
size size size
Loadings of 1. RP-PCA Factor Loadings of 2. RP-PCA Factor Loadings of 3. RP-PCA Factor

0.5
1.7
low 1.7 1.7 1.6 1.5 1.1 low 0.1 0.2 0.2 0.3 0.3 0.2 low 0.5 0.3 0.1 -0.0 -0.2 0.4
1.6
0.1
0.3
1.5
2 1.4 1.5 1.3 1.3 1.0 2 -0.0 0.2 0.2 0.3 0.2 0.0 2 0.4 0.2 0.0 -0.1 -0.3
0.2
1.4
-0.1
0.1
short rev
short rev
short rev
1.3
3 1.2 1.3 1.2 1.1 0.9 3 -0.0 0.0 0.1 0.1 0.1 3 0.3 0.2 0.0 -0.1 -0.3
-0.2
0.0
1.2
-0.3
-0.1
4 1.2 1.2 1.1 1.0 0.8 1.1 4 -0.2 -0.1 -0.1 -0.1 -0.0 4 0.3 0.1 -0.0 -0.2 -0.4
-0.4
-0.2
1.0
-0.5
-0.3
high 1.0 1.2 1.1 1.0 0.8 0.9 high -0.7 -0.5 -0.5 -0.4 -0.3 high 0.2 0.0 -0.1 -0.2 -0.4
-0.6
-0.4
2
4
l
g
al
al
al
bi
bi
bi
sm
sm
sm
size size size
Loadings of 1. PCA Factor Loadings of 2. PCA Factor Loadings of 3. PCA Factor

1.4
0.4
low 1.4 1.4 1.3 1.2 1.0 low 0.5 0.2 0.1 -0.1 -0.2 0.4 low 0.2 0.3 0.3 0.4 0.4
1.3 0.3
0.3
2 1.1 1.1 1.1 1.0 0.8 1.2 2 0.4 0.2 0.0 -0.1 -0.3 2 0.1 0.1 0.1 0.2 0.2 0.2
0.2
0.1
short rev
short rev
short rev
1.1 0.1
3 1.0 1.1 1.0 0.9 0.7 3 0.4 0.2 0.0 -0.2 -0.3 3 -0.0 -0.0 0.0 0.1 0.1
0.0
0.0
1.0
-0.1
4 1.0 1.0 1.0 0.9 0.7 4 0.3 0.1 -0.0 -0.2 -0.4 -0.1 4 -0.1 -0.1 -0.1 -0.1 -0.1
0.9
-0.2 -0.2
0.8
high 1.2 1.2 1.1 1.0 0.8 high 0.3 0.1 0.0 -0.2 -0.3 high -0.3 -0.3 -0.4 -0.4 -0.3
-0.3 -0.3
2
4
l
g
al
al
al
bi
bi
bi
sm
sm
sm
size size size

Eigenvalue Differences
1.2
=-1
1 =0
Eigenvalue Difference
=5
=10
0.8
=20
Critical value
0.6
0.4
0.2
0
2 4 6 8 10 12 14 16
Number
Eigenvalue Differences
3
=-1
2.5 =0
Eigenvalue Difference
=5
=10
2
=20
Critical value
1.5
0.5
0
2 4 6 8 10 12 14 16
Number

SR
-1 0.11 0.12 0.21 0.26 0.38 0.40 0.42 0.44 0.44 0.47
0 0.11 0.12 0.23 0.28 0.41 0.46 0.46 0.48 0.49 0.51
0.55
2 0.11 0.13 0.26 0.32 0.48 0.49 0.50 0.52 0.53 0.55
4 0.11 0.16 0.29 0.35 0.49 0.51 0.52 0.53 0.55 0.56
6 0.11 0.24 0.30 0.37 0.50 0.52 0.52 0.54 0.55 0.57
0.50
8 0.11 0.27 0.32 0.38 0.50 0.52 0.53 0.54 0.56 0.57
10 0.11 0.29 0.33 0.39 0.50 0.53 0.53 0.54 0.56 0.58
12 0.11 0.30 0.34 0.40 0.50 0.53 0.53 0.55 0.56 0.58 0.45
14 0.11 0.31 0.34 0.40 0.51 0.53 0.53 0.55 0.56 0.58
16 0.11 0.32 0.35 0.41 0.51 0.53 0.53 0.55 0.56 0.58
18 0.11 0.32 0.35 0.41 0.51 0.53 0.54 0.55 0.56 0.58 0.40
20 0.11 0.33 0.35 0.41 0.51 0.53 0.54 0.55 0.56 0.58
22 0.12 0.33 0.36 0.41 0.51 0.53 0.54 0.55 0.56 0.58
0.35
24 0.12 0.33 0.36 0.41 0.51 0.53 0.54 0.55 0.56 0.58
26 0.12 0.34 0.36 0.42 0.51 0.53 0.54 0.55 0.57 0.58
28 0.12 0.34 0.36 0.42 0.51 0.53 0.54 0.55 0.57 0.58
0.30
30 0.12 0.34 0.36 0.42 0.51 0.53 0.54 0.55 0.57 0.58
32 0.12 0.34 0.36 0.42 0.51 0.53 0.54 0.55 0.57 0.58
34 0.12 0.34 0.36 0.42 0.51 0.53 0.54 0.55 0.57 0.58
0.25
36 0.12 0.34 0.37 0.42 0.51 0.53 0.54 0.55 0.57 0.58
38 0.12 0.35 0.37 0.42 0.51 0.53 0.54 0.55 0.57 0.58
40 0.12 0.35 0.37 0.42 0.51 0.53 0.54 0.55 0.57 0.58
0.20
42 0.12 0.35 0.37 0.42 0.51 0.53 0.54 0.55 0.57 0.58
44 0.12 0.35 0.37 0.42 0.51 0.53 0.54 0.55 0.57 0.58
46 0.12 0.35 0.37 0.42 0.51 0.53 0.54 0.55 0.57 0.58 0.15
48 0.12 0.35 0.37 0.42 0.51 0.53 0.54 0.55 0.57 0.58
50 0.12 0.35 0.37 0.42 0.51 0.53 0.54 0.55 0.57 0.58
1 2 3 4 5 6 7 8 9 10
Number of factors

0.6 0.6
0.4 0.4
0.2 0.2
RP-PCA PCA RP-PCA PCA
0.35 0.35
0.3 0.3
0.25 0.25
0.2 0.2
0.15 0.15
1 factor
2 factors
3 factors
4 factors
20 5 factors 20
6 factors
7 factors
15 8 factors 15
9 factors
10 factors
10 10

in in
0
0
0.1
0.2
0.3
0.4
0.5
0.2
0.4
0.6
dr dr
in r in r
dm evl dm evl
om v om v
re re
in v in v
dr dr
re re
se v se v
as as
o o
va n va n
lp lp
ro ro
m f m f
va om va om
lm 1 lm 1
om 2 om 2
pr pr
of of
in in
v v
ci ci
ig s s ig ss
ro ro
w w
th th
sp sp
e ep
Ac p Ac
cr cr
ua ua
l l
va va
lu lu
e e
At pro At pro
ur f ur f
no no
v v
va er va er
lm lm
om om
RMS
RMS
cf cf
m p m p
om om
re re
gr v gr v
ow ow
th th
lrr lrr
e e
In-Sample
in in
dm v dm v
Out-Of-Sample
om om
iv iv
va ol va ol
lu lu
em em
st st
re re
v v
si si
ze ze
m m
om om

ro ro
aa aa
le le
v v
di di
vp vp
no no
in a in a
vc vc
ap ap
r ro
gm oea gm ea
ar ar
gi gi
ns ns
sh sh
vo vo
l l
pr pr
PCA
PCA
sg ice sg ice
ro ro
w w
RP-PCA
RP-PCA
th th
-1.5
-0.5
-0.6
-0.4
-0.2
-0.5
-0.8
-0.6
-0.4
-0.2
-1
-1
0.5
0.2
0.4
0.6
0.8
0.5
1.5
0.2
0.4
0.6
0.8
0.2
0.4
0.6
0.8
0
1
0
0
1
0
0
1
re re re re re
ve ve ve ve ve
va rs va rs va r sa va r sa rs
lu al lu al lu l lu l va al
e e e e lu
in
te
in
te
in
te
in
te e
in
ra ra ra ra te
ct ct c c ra
io io tio tio ct
n n n n io
n
m m m m
om om om om m
en en en en om
t um t um tu tu
m m en
tu
m
va va va va
lu lu lu lu
e e e e va
in in in in lu
ve ve ve ve e
st st st st
m m m m in
ve
en en en en
t t t t st
m
en
t
ot ot ot ot
he he he he
r r r r
pr pr pr pr ot
he
of
ita
of
ita
of
ita
of
ita r
bi bi bi bi pr
tr lit tr lit tr lit tr lit
y y y y
Category Composition of Factor 5 for (RP-PCA)

ad ad ad ad of
in in in in ita
g g g g bi
lit
fr fr fr fr tr y
ic ic ic ic
tio tio tio tio ad
in
ns ns ns ns g
fr
ic
tio
Decile 1
ns
Decile 10
-0.4
-0.2
-0.8
-0.6
-0.4
-0.2
-0.8
-0.6
-0.4
-0.2
-0.8
-0.6
-0.4
-0.2
-1
0.2
0.4
0.6
0.2
0.4
0.6
0.8
0.2
0.4
0.6
0.8
0.2
0.4
0.6
0.2
0.4
0.6
0.8
0
0
0
0
0
1
re re re re re
ve ve ve ve ve
va rs va rs va r sa va r sa rs
lu al lu al lu l lu l va al
e e e e lu
in
te
in
te
in
te
in
te e
in
ra ra ra ra te
ct ct c c ra
io io tio tio ct
n n n n io
n
m m m m
om om om om m
en en en en om
t um t um tu tu
m m en
tu
m
va va va va
lu lu lu lu
e e e e va
in in in in lu
e

ve ve ve ve
st st st st
m m m m in
ve
en en en en
t t t t st
m
en
t
ot ot ot ot
he he he he
r r r r
pr pr pr pr ot
he
of
ita
of
ita
of
ita
of
ita r
bi bi bi bi
Category Composition of Factor 5 for (PCA)

tr lit tr lit tr lit tr lit pr

ad y ad y ad y ad y of
in in in in ita
g g g g bi
lit
fr fr fr fr tr y
ic ic ic ic
tio tio tio tio ad
in
ns ns ns ns g
fr
ic
tio
Decile 1
ns
Decile 10
RP-PCA LS-Factors Correlations PCA LS-Factors Correlations
1 1
0.8 0.8
Generalized Correlations
Generalized Correlations
0.6 0.6
0.4 0.4
1. GC 1. GC
2. GC 2. GC
0.2 3. GC 0.2 3. GC
4. GC 4. GC
5. GC 5. GC
0 0
0 5 10 15 20 0 5 10 15 20
Number of LS-factors Number of LS-factors

RP-PCA (total vs. time-varying) PCA (total vs. time-varying)
1 1
0.8 0.8
Generalized Correlation
0.6 0.6
0.4 0.4
1st GC
2nd GC
0.2 3rd GC 0.2
4th GC
5th GC
0 0
0 50 100 150 200 250 300 350 400 0 50 100 150 200 250 300 350 400
Time Time
RP-PCA (total vs. time-varying) PCA (total vs. time-varying)

1 1
0.8 0.8
0.6 0.6
0.4 0.4
1st GC
2nd GC
0.2 3rd GC 0.2
4th GC
5th GC
0 0
1995 2000 2005 2010 1995 2000 2005 2010
Time Time

Correlation 1. Factor
1
0.8
0.6
Corr
0.4
SR=0.6
0.2 SR=0.3
SR=0.1
0
0 5 10 15 20
SR 1. Factor
0.15
0.1
SR
0.05 SR=0.6
SR=0.3
SR=0.1
0
0 5 10 15 20

Correlation 2F =0.05 Correlation 2F =0.1 Correlation 2F =0.5
1 1 1
Corr
Corr
Corr
0.5 0.5 0.5
SR=0.6
SR=0.3
SR=0.1
0 0 0
0 5 10 15 20 0 5 10 15 20 0 5 10 15 20
SR 2F =0.05 SR 2F =0.1 SR 2F =0.5

0.6 0.6 0.6
0.4 0.4 0.4

SR
SR
0.2 0.2
SR 0.2
0 0 0
0 5 10 15 20 0 5 10 15 20 0 5 10 15 20
2 2 2
Normalized RMSE F
=0.05 Normalized RMSE F
=0.1 Normalized RMSE F
=0.5
2 2 2
RMSE
RMSE
RMSE
1.5 1.5 1.5
1 1 1
0 5 10 15 20 0 5 10 15 20 0 5 10 15 20

1. Factor 2. Factor
400 150
True factor
300 RP-PCA =0
RP-PCA =10 100
RP-PCA =20
200 PCA
50
100
0
0
-100 -50
0 100 200 300 400 500 600 700 0 100 200 300 400 500 600 700
Time Time

Factors That Fit The Time Series and Cross-Section of Stock Returns

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Factors That Fit The Time Series and Cross-Section of Stock Returns

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✩

Electronic copy available at: https://ssrn.com/abstract=3211106

Electronic copy available at: https://ssrn.com/abstract=3211106

Electronic copy available at: https://ssrn.com/abstract=3211106

Loadings of 1. PCA Factor Loadings of 2. PCA Factor Loadings of 3. PCA Factor

size size size

Loadings of 1. RP-PCA Factor Loadings of 2. RP-PCA Factor Loadings of 3. RP-PCA Factor

size size size

Loadings of 1. PCA Factor Loadings of 2. PCA Factor Loadings of 3. PCA Factor

size size size

Electronic copy available at: https://ssrn.com/abstract=3211106

Electronic copy available at: https://ssrn.com/abstract=3211106

Electronic copy available at: https://ssrn.com/abstract=3211106

RP-PCA PCA RP-PCA PCA

RP-PCA PCA RP-PCA PCA

RP-PCA PCA RP-PCA PCA

Electronic copy available at: https://ssrn.com/abstract=3211106

Electronic copy available at: https://ssrn.com/abstract=3211106

Category Composition of Factor 5 for (RP-PCA)

Electronic copy available at: https://ssrn.com/abstract=3211106

Category Composition of Factor 5 for (PCA)

tr lit tr lit tr lit tr lit pr

Electronic copy available at: https://ssrn.com/abstract=3211106

RP-PCA (total vs. time-varying) PCA (total vs. time-varying)

Electronic copy available at: https://ssrn.com/abstract=3211106

Electronic copy available at: https://ssrn.com/abstract=3211106

SR 2F =0.05 SR 2F =0.1 SR 2F =0.5

0.4 0.4 0.4

1.5 1.5 1.5

Electronic copy available at: https://ssrn.com/abstract=3211106

Electronic copy available at: https://ssrn.com/abstract=3211106

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