Today there are dozens of papers existing which investigate the relationship between macroeconomic variables such as GDP growth, exchange rates, inflation, etc. and the 4 factors used in the Carhart 4-factor model. However, most of the papers select corresponding control variables a priori and might miss some macroeconomic variables which hold much information about one of the factors. Overcoming this problem constitutes the core of this paper. With a three tiered statistical procedure which comprises the use of clustering and LASSO regressions I am aiming at solving that challenge. I start with more than 300 macroeconomic control variables which proxy for all possible variables out there and select those with the highest explanatory power.
Table on contents
1. Introduction
2. Literature Review
a. Potential pitfalls
b. Results and conclusions
3. Empirical analysis
a. Data
b. Variable grouping
c. Variable selection
d. Regression
4. Conclusion
Appendix
List of literature
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