A Comparison of New Factor Models

67 Pages Posted: 11 Nov 2014 Last revised: 19 Apr 2017

Kewei Hou

Ohio State University (OSU) - Department of Finance

Chen Xue

University of Cincinnati

Lu Zhang, 张橹

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

Multiple version iconThere are 2 versions of this paper

Date Written: April 18, 2017

Abstract

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

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

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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