One Factor to Bind the Cross-Section of Returns

We propose a new non-linear single-factor asset pricing model r_it=h(f_tλ_i)+ϵ_it. Despite its parsimony, this model represents exactly any non-linear model with an arbitrary number of factors and loadings – a consequence of the Kolmogorov-Arnold representation theorem. It features only one pricing component h(f_tλ_I), comprising a nonparametric link function of the time-dependent factor and factor loading that we jointly estimate with sieve-based estimators. Using 171 assets across major classes, our model delivers superior cross-sectional performance with a low-dimensional approximation of the link function. Most known finance and macro factors become insignificant controlling for our single-factor.