Abstract

http://ssrn.com/abstract=2011221
 
 

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The Investment Manifesto


Xiaoji Lin


Ohio State University (OSU) - Fisher College of Business

Lu Zhang


Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

December 5, 2012

AFA 2013 San Diego Meetings Paper

Abstract:     
A deep-ingrained doctrine in asset pricing says that if an empirical characteristic-return relation is consistent with investor “rationality,” the relation must be “explained” by a risk (factor) model. The investment approach questions the doctrine. Factors formed on characteristics are not necessarily risk factors; characteristics-based factor models are linear approximations of firm-level investment returns. The evidence that characteristics dominate covariances in horse races does not necessarily mean mispricing; measurement errors in covariances are likely to blame. Most important, risks do not “determine” expected returns; the investment approach is no more and no less “causal” than the consumption approach in “explaining” anomalies.

Number of Pages in PDF File: 36

Keywords: The risk doctrine, investment-based asset pricing, measurement errors in covariances, characteristics, asset pricing anomalies

JEL Classification: D21, D92, E22, E44, G12, G14, G31, G32, G35

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Date posted: December 15, 2012  

Suggested Citation

Lin, Xiaoji and Zhang, Lu, The Investment Manifesto (December 5, 2012). AFA 2013 San Diego Meetings Paper. Available at SSRN: http://ssrn.com/abstract=2011221 or http://dx.doi.org/10.2139/ssrn.2011221

Contact Information

Xiaoji Lin
Ohio State University (OSU) - Fisher College of Business ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States
Lu Zhang (Contact Author)
Ohio State University - Fisher College of Business ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States
585-267-6250 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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