Financial factors selection with knockoffs: fund replication, explanatory and prediction networks

TL;DR

This paper introduces a method using knockoff procedures for selecting financial factors, enabling control over false discoveries, and demonstrates its application in fund replication and network inference.

Contribution

It presents a novel application of knockoff techniques to finance for factor selection, fund replication, and network inference, ensuring controlled false discovery rates.

Findings

Effective control of false discoveries in factor selection

Successful application to fund replication tasks

Versatile use in inference of financial networks

Abstract

We apply the knockoff procedure to factor selection in finance. By building fake but realistic factors, this procedure makes it possible to control the fraction of false discovery in a given set of factors. To show its versatility, we apply it to fund replication and to the inference of explanatory and prediction networks.