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Digesting Anomalies: An Investment Approach

Review of Financial Studies, Forthcoming

Fisher College of Business Working Paper No. WP 2012-03-021

Dice Center Working Paper No. 2012-21

182 Pages Posted: 12 Oct 2014  

Kewei Hou

Ohio State University (OSU) - Department of Finance

Chen Xue

University of Cincinnati

Lu Zhang

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

Multiple version iconThere are 3 versions of this paper

Date Written: October 1, 2014

Abstract

An empirical q-factor model consisting of the market factor, a size factor, an investment factor, and a profitability factor largely summarizes the cross section of average stock returns. A comprehensive examination of nearly 80 anomalies reveals that about one-half of the anomalies are insignificant in the broad cross section. More importantly, with a few exceptions, the q-factor model’s performance is at least comparable to, and in many cases better than that of the Fama-French (1993) 3-factor model and the Carhart (1997) 4-factor model in capturing the remaining significant anomalies.

Keywords: The q-factor model, anomalies, factor regressions

JEL Classification: G12, G14

Suggested Citation

Hou, Kewei and Xue, Chen and Zhang, Lu, Digesting Anomalies: An Investment Approach (October 1, 2014). Review of Financial Studies, Forthcoming; Fisher College of Business Working Paper No. WP 2012-03-021; Dice Center Working Paper No. 2012-21. Available at SSRN: https://ssrn.com/abstract=2508322

Kewei Hou

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-0552 (Phone)
614-292-2418 (Fax)

Chen Xue

University of Cincinnati ( email )

College of Business Administration
Cincinnati, OH 45221
United States
(513) 556-7078 (Phone)

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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