Tradable Factor Risk Premia and Oracle Tests of Asset Pricing Models - new publication by Fabio Trojani
In a new study, Professor Fabio Trojani and his co-authors isolate the core economic assumptions that lead to misspecification and identification failures in conventional approaches to estimating factor risk premia.
To overcome these challenges, they introduce Tradable Factor Risk Premia (TFRP), defined as the negative covariance between a factor and the projection of the stochastic discount factor onto the span of asset returns. TFRP are point-identified, invariant to the presence of other factors, and admit a natural interpretation via mimicking portfolios. They also facilitate Oracle estimation and inference - behaving as if weak or irrelevant factors were known in advance.
Empirically, they conduct the first large-scale investigation of the identification problem across the full factor zoo, demonstrating that identification failure is both pervasive and consequential.
The paper "Tradable Factor Risk Premia and Oracle Tests of Asset Pricing Models" is forthcoming in the Journal of Financial Economics.
It is co-authored with Svetlana Bryzgalova from the Centre for Economic Policy Research (CEPR), Alberto Quaini from Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) and Ming Yuan from Columbia University.
Apr 26, 2026