Macro Factor Identification in Cross-Sectional Equity Returns

This paper applies sparse principal component analysis to a broad panel of macroeconomic and financial series to identify a small set of latent factors that explain cross-sectional variation in equity returns. We assess factor stability across economic expansions and contractions and evaluate the incremental explanatory contribution beyond standard risk factors. The approach provides a data-driven alternative to pre-specified macroeconomic indicators while maintaining interpretability through sparsity constraints.