UCL Department of Economics


Cemmap seminar presented by Svetlana Bryzgalova (LBS)

12 November 2019, 12:30 pm–1:30 pm

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Bayesian Solutions for the Factor Zoo: We Just Ran Two Quadrillion Models (joint with Christian Julliard and Jiantao Huang)

Event Information

Open to

UCL staff | UCL students


Daniel Wilhelm


IFS Conference Room
7 Ridgemount Street
United Kingdom

Abstract: We propose a novel, and simple, Bayesian estimation and model selection procedure for cross-sectional asset pricing. Our approach, that allows for both tradable and non-tradable factors, and is applicable to high dimensional cases, has several desirable properties. First, weak and spurious factors lead to diffuse, and centered at zero, posteriors for their market price of risk, making such factors easily detectable. Second, posterior inference is robust to the presence of such factors. Third, we show that flat priors for risk premia lead to improper marginal likelihoods, rendering model selection invalid. Therefore, we provide a novel prior, that is diffuse for strong factors but shrinks away useless ones, under which posterior probabilities are well behaved, and can be used for factor and (non necessarily nested) model selection, as well as model averaging, in large scale problems. We apply our method to a very large set of factors proposed in the literature, and analyse 2.25 quadrillion possible models, gaining novel insights on the empirical drivers of asset returns.

Paper available



About the Speaker

Svetlana Bryzgalova

at LBS

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