This chapter surveys recent econometric methodologies for inference in large dimensional conditional factor models in finance. Changes in the business cycle and asset characteristics induce time variation in factor loadings and risk premia to be accounted for. The growing trend in the use of...

We build a simple diagnostic criterion for approximate factor structure in large panel datasets. Given observable factors, the criterion checks whether the errors are weakly cross-sectionally correlated or share at least one unobservable common factor (interactive effects). A general version...

In this article we examine the risk factors that help explain long/short equity (LSE) mutual fund performance. We show that for most LSE mutual funds, 50%-80% of their returns can be explained using common factors such as capitalization, book-to-value ratio, dividend yield, and volatility. The...

The paper describes the specification, estimation, and testing of an unrestricted structural econometric model design to explain and forecast individual returns of securities listed on the Brazilian stock market. The model's explanatory variables include macroeconomic, fundamental and...

In this paper, we present a continuous time Capital Asset Pricing Model where the volatilities of the market index and the stock are both stochastic. Using a singular perturbation technique, we provide approximations for the prices of European options on both the stock and the index. We derive...

We propose a new method, VASA, based on variable subsample aggregation of model predictions for equity returns using a large-dimensional set of factors. To demonstrate the effectiveness, robustness, and dimension reduction power of VASA, we perform a comparative analysis between state-of-the-art...

This paper considers a paradigm financial markets trades booking and valuation, data subscription and portfolio revaluation system. Traded instruments covered include: spot and forward exchange rates (FX); credit default swaps (CDS); total return swaps (TRS); commodity and bond futures; traded...

Portfolio sorting is ubiquitous in the empirical finance literature, where it has been widely used to identify pricing anomalies in different asset classes. Despite the popularity of portfolio sorting, little attention has been paid to the statistical properties of the procedure or to the...

We estimate the equity risk premium by combining information from twenty models. Our main finding is that there is broad agreement across models that the equity premium reached historical heights in July 2013 even when the models are substantially different from each other and use more than one...

We discuss the finding that cross-sectional characteristic based models have yielded portfolios with higher excess monthly returns but lower risk than their arbitrage pricing theory counterparts in an analysis of equity returns of stocks listed on the JSE. Under the assumption of general...