Factoring Profitability

9 Pages Posted: 21 Dec 2013

See all articles by Michael Branch

Michael Branch

Aperio Group

Lisa R. Goldberg

University of California, Berkeley; Aperio Group

Ran Leshem

Aperio Group

Date Written: December 18, 2013

Abstract

Recent studies in financial economics posit a connection between a gross prof- itability strategy and quality investing. We explore this connection with two widely used factor models. The first is the four-factor Fama-French-Carhart model, which is a mainstay of empirical research in academia. The second is the Barra USE4 multi-factor model. Our findings are: Consistent with results reported by other researchers, the Fama-French-Carhart model does not provide a satisfactory replication of the gross profitability strategy over the period July 1995-December 2012; Over the same period, the Barra USE4 multi-factor model, which is a standard for practitioners, replicates a substantial portion of the gross profitability strategy with quality and momentum factors; The book to market factor, which is one of three value factors in the Barra USE4 model and the only value factor in the Fama-French-Carhart model, does not make a significant contribution to the gross profitability strategy; However, the Barra USE4 earnings yield factor, which is another measure of value, does make a significant contribution to the gross profitability strategy.

Importantly, our results rely on relatively short data histories. More time is required to determine their efficacy in the long term.

Keywords: gross profitability, quality, factor model, value, earnings yield, book to market, momentum, factor replication

JEL Classification: G11, G12

Suggested Citation

Branch, Michael and Goldberg, Lisa R. and Leshem, Ran, Factoring Profitability (December 18, 2013). Available at SSRN: https://ssrn.com/abstract=2369491 or http://dx.doi.org/10.2139/ssrn.2369491

Michael Branch

Aperio Group ( email )

3 Harbor Drive
Suite 315
Sausalito, CA 94965
United States

Lisa R. Goldberg (Contact Author)

University of California, Berkeley ( email )

Department of Statistics
367 Evans Hall
Berkeley, CA 94720-3860
United States

Aperio Group ( email )

3 Harbor Drive
Suite 315
Sausalito, CA 94965
United States

Ran Leshem

Aperio Group ( email )

3 Harbor Drive
Suite 315
Sausalito, CA 94965
United States

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