This paper considers two methods of estimating factor mimicking portfolios from asset returns: Two-pass cross-sectional regression and asymptotic principal components. We show that, for a balanced panel of assets, iterating the two-pass cross-sectional regression converges to the same estimated...

We suggest a technique for estimating pervasive economic factors which allows the use of all available security return data. The resulting factor estimates can be used in applications and tests of the Arbitrage Pricing Theory (APT). An obvious advantage of the technique is that more precise...

This paper develops a dynamic approximate factor model in which returns are time-series heteroskedastic. The heteroskedasticity has three components: a factor-related component, a common asset-specific component, and a purely asset-specific component. We develop a new multivariate GARCH model...

An important issue in applications of multifactor models of asset returns is the appropriate number of factors. Most extant tests for the number of factors are valid only for strict factor models, in which diversifiable returns are uncorrelated across assets. In this paper we develop a test...

This paper develops a new estimation procedure for characteristic-based factor models of security returns. We treat the factor model as a weighted additive nonparametric regression model, with the factor returns serving as time-varying weights, and a set of univariate non-parametric functions...