Extracting Factors from Heteroskedastic Asset Returns

By Jones Christopher
Journal of Financial Economics (2001)

  • Christopher Jones

    University of Southern California

    USA

Created

October 1, 2013

Last update

June 20, 2016

Software

Matlab

Ranking

64

Visits

2120

Downloads

156

Description

This code implements two factor extraction methods: the heteroskedastic factor analysis (HFA) of Jones (2001) and the asymptotic principal components procedure (CK) of Connor and Korajczyk (1986). The HFA method can improve the quality of the extracted factors by allowing for heteroskedastic residuals. Besides, it does not require any extra assumptions to those in CK. The user must specify a T*N matrix of returns and the number of factors to extract. The number of iterations in the optimization process is by default set to 5. The minimum allowable average ideosyncratic standard deviation is by default set equal to .001.

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