Topic：Validating Market Risk Factors and Forecasting Bond Risk Premia using Novel Factor Models
Speaker：Jianqing Fan, Princeton University
Host：Professor Li Ping
Time：2017.3.20 14:00
Location：New Main Building A928
Abstract：
We provide econometrics methods and analysis for validating market risk factors and forecasting bond risk premium via factor models in which the latent factors can be partially explained by several observed explanatory proxies. In financial factor models for instance, the unknown factors can be reasonably well predicted by a few observable proxies, such as the Fama-French factors.In diffusion index forecasts, identified factors are strongly related to several directly measurable economic variables such as consumption-wealth variable,financial ratios, and term spread. To incorporate the explanatory power of these observed characteristics, we propose a new two-step estimation procedure:
(i)Regress the data onto the observables, and (ii) take the principal components of the fitted data to estimate the loadings and factors. The proposed estimator is robust to possibly heavy-tailed distributions, which are encountered by many macroeconomic and financial time series. With those proxies, the factors can be estimated accurately even if the cross-sectional dimension is mild. Empirically,we apply the model to forecast US bond risk premia, and find that the observed macroeconomic characteristics contain strong explanatory powers of the factors.The gain of forecast is more substantial when these characteristics are incorporated to estimate the common factors than directly used for forecasts.
Aboutthe speaker：
Jianqing Fan is Frederick L. Moore '18 Professor of Finance, Professor of Statistics,andformer Chairman of Department of Operations Research and Financial Engineering at the Princeton University. He previously held professorships at CUHK,UNC-Chapel Hill, and UCLA. He has authored or co-authored over 200 articles on financial econometrics, computational biology, and various aspects of theoretical and methodological statistics. His finance work focuses ontheanalysis of high-frequency data, portfolio allocation, risk management,timeseries, high-dimensional data, and non-parametric modelling. His published work has been recognised by the 2000 COPSS Presidents’Award,the 2007 Morningside Gold Medal of Applied Mathematics, and a Guggenheim Fellowship in 2009,Academian of Academia Sinica 2012, Guy Medal in Silver,2014. He is an Elected Fellow of the American Association for Advancement of Science, the Institute of Mathematical Statistics, and the American Statistical Association, and a past President of the Institute of Mathematical Statistics.He is the co-editor of Journal of Econometrics and associate editor of Journal of American Statistical Association, and past co-editor of Annals of Statistics and Probability Theory and Related Fields and has served as co-editor of Econometrics Journal and as associate editor of Econometrica, and Journal of Financial Econometrics.
