Augmented Factor Models with Applications to Validating Market Risk Factors and Forecasting Bond Risk Premia
增广因子模型:市场风险因子验证与债券风险溢价预测
We study factor models augmented by observed covariates that have explanatory powers on the unknown factors. In financial factor models, the unknown factors can be reasonably well explained 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. With those covariates, both the…