Stock characteristics are connected to expected returns because they tell us about risk exposures; and only a few characteristics are really necessary for that.
Factor estimation using instrumental data to capture both cross-sectional and time-series variation in factor loadings [SSRN]
We evaluate a wide array of systemic risk indicators and their ability to forecast the quantiles of real activity, and propose methods for combining them that show there is a latent systemic risk factor that is robustly related to future macroeconomic downside risk. [publication] [SSRN]
The 3PRF is a simple least squares forecaster using many predictor variables that directly estimates the relevant forecast factors and is asymptotically normal for the best possible forecast. [publication] [SSRN]