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...

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 examine which factor model best captures systematic return covariation by focusing on the economic implications for portfolio risk control. The pairwise variance equality test and the model confidence set procedure suggest that the Fama and French (2015) five-factor model, the Barillas and...

It has been well known in financial economics that factor betas depend on observed instruments such as firm specific characteristics and macroeconomic variables, and a key object of interest is the effect of instruments on the factor betas. One of the key features of our model is that we specify...

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...

We compare major factor models and find that the Stambaugh and Yuan (2016) four-factor model is the overall winner in the time-series domain. The Hou, Xue, and Zhang (2015) q-factor model takes second place and the Fama and French (2015) five-factor model and the Barillas and Shanken (2018)...

We study the temporal behavior of the cross-sectional distribution of assets' market exposure, or betas, using a large panel of high-frequency returns. The asymptotic setup has the sampling frequency of returns increasing to infinity, while the time span of the data remains fixed, and the...

We develop a test for deciding whether the linear spaces spanned by the factor exposures of a large cross-section of assets toward latent systematic risk factors at two distinct points in time are the same. The test uses a panel of asset returns in local windows around the two time points. The...

Our objective is to develop a methodology to price the cross section of asset returns. Despite the hundreds of systematic risk factors considered in the literature (``factor zoo''), there is still a sizable pricing error. We show that what is missing in asset-pricing factor models is not...