A Comparison of New Factor Models

Using hundreds of significant anomalies as testing portfolios, this paper compares the performance of major empirical asset pricing models. The q-factor model and a closely related five-factor model are the two best performing models among a long array of models. The q-factor model outperforms the five-factor model in factor spanning tests and in explaining momentum and profitability anomalies, but the five-factor model has an edge in explaining value-versus-growth anomalies. Investment and profitability, not liquidity, are the key driving forces in the broad cross section of expected stock returns.

Keywords: Q-factor model, investment-based asset pricing, capital markets anomalies, factor regressions

JEL Classification: G12, G14

Suggested Citation: Suggested Citation

Hou, Kewei and Xue, Chen and Zhang, Lu, A Comparison of New Factor Models (April 18, 2017). Fisher College of Business Working Paper No. 2015-03-05, HKUST Finance Symposium 2016: Active Investing and Arbitrage Capital, Charles A. Dice Center Working Paper No. 2015-05, Available at SSRN: https://ssrn.com/abstract=2520929 or http://dx.doi.org/10.2139/ssrn.2520929