A Protocol for Factor Identification

We propose a protocol for identifying genuine risk factors. A genuine risk factor must be related to the covariance matrix of returns, must be priced in the cross-section of returns, and should yield a reward-to-risk ratio that is reasonable enough to be consistent with risk pricing. A market factor, a profitability factor, and traded versions of macroeconomic factors pass our protocol, but many characteristic-based factors do not. Several of the underlying characteristics, however, do command premiums in the cross-section

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Year of publication:	2018
Authors:	Kuntara Pukthuanthong
Other Persons:	Roll, Richard (contributor) ; Subrahmanyam, Avanidhar (contributor)
Publisher:	[2018]: [S.l.] : SSRN
Subject:	Faktorenanalyse \| Factor analysis \| Simulation \| Risiko \| Risk