The annual AQR Insight Award is presented by AQR Capital Management, an investment firm with a focus on strategies informed by quantitative research. The award “recognizes important, unpublished papers that provide the most significant, new practical insights for tax-exempt institutional or taxable investor portfolios.” The authors of the two winning papers will split a $100,000 prize.
“Taming the Factor Zoo,” written with Guanhao Feng of the City University of Hong Kong and Dacheng Xiu of the University of Chicago, aims to provide a method for evaluating the many factors that have been proposed to explain asset pricing. Using machine learning, their model determines if a new factor better explains the cross-section of asset prices when combined with existing factors. The authors then apply the model to a variety of recently proposed factors and determine that with a few exceptions—including profitability and investment—the new factors are redundant, failing to offer greater explanatory power.
“Making meaningful progress in asset pricing research requires an improved framework for evaluating and disciplining the proliferation of asset pricing factors,” AQR’s citation says. “This suggests a robust approach for studying the marginal contribution of new factors relative to the immense set of existing ones is needed to allow a way to screen new factors as they are proposed. The authors offer a two-step model-selection method to bring discipline to this challenge and to help researchers organize the current zoo of factors.”