Overshooting the Coordinate: Where Factor Corrections Land on Characteristic Axes

2026/07/06 by Useong Shin · 1 voice
Economics, Econometrics and Finance · #q-fin.GN #q-fin.CP #q-fin.PR #q-fin.ST

paper · pdf

Abstract

I propose a cap-axis zero-alpha diagnostic for factor-model evaluation. Whole-stock capitalization prefixes are paired with equal realized exposure to the aggregate market, producing a bridge-alpha curve that localizes pricing errors within the market. Finite-grid HAC-Gaussian inference and residual-block calibration provide size-controlled functional tests. In 1967--2024 CRSP data, q5's negative daily bridge attenuates under lead--lag correction and is small monthly, whereas Fama-French and Carhart bridges become more visible monthly. Across 155 factors, cap-axis magnitude is neither a monotone transformation of maximum-Sharpe gain nor explained by exposure to FF3 SMB.

Discussions

• Useong Shin: Any Axes Are Allowed: A Characteristic-Axis Integral Diagnosis of Factor Models https://arxiv.org/abs/2607.05091 https://arxiv.org/pdf/2607.05091 https://arxiv.org/html/2607.05091 [bsky, 0 points, 0 comments]

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