Overshooting the Coordinate: Where Factor Corrections Land on Characteristic Axes
arXiv:2607.05091
The paper proposes a characteristic‑axis diagnostic that maps model alphas to see how factor corrections affect pricing errors along specific characteristics, finding that different factors (profitability, momentum, value, investment) impact these errors in distinct ways.
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.
It is no longer AAAA, but the paper has grown up a little