The Virtue of Sparsity in Complexity

ArXi:2604.17166v1 Announce Type: cross Sparsity or complexity? In modern high-dimensional asset pricing, these are often viewed as competing principles: richer feature spaces appear to favor complexity, while economic intuition has long favored parsimony. We show that this tension is misplaced. We distinguish capacity sparsity-the dimensionality of the candidate feature space-from factor sparsity-the parsimonious structure of priced risks-and argue that the two are complements: expanding capacity enables the discovery of factor sparsity.