Domesticating the Factor Zoo with Economic Theory

Confusion around the so-called factor zoo is largely due to a failure to distinguish between “attribution” factors and “priced” factors emanating from an asset pricing model. Attribution factors have a zero <italic>expected</italic> mean, do not emanate from asset pricing models, are high in number, can be short term, and should not drive investment policy. Priced factors should have nonzero <italic>expected</italic> premiums, emanate from an asset pricing model, be low in number, be long term, and influence investment policy. Empirical attempts to tame the factor zoo that distinguish between useful, useless, and redundant factors are helpful but could benefit from an overarching theory. The popularity asset pricing model (PAPM), an equilibrium model in which priced factors primarily emanate from the collective tastes of investors, provides a framework for identifying and understanding priced factors, leading to a domesticated factor farm.