Charles A. Dice Center Working Paper No. 2015-05
67 Pages Posted: 11 Nov 2014 Last revised: 19 Apr 2017
Date Written: April 18, 2017
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