52 Pages Posted: 17 Nov 2014 Last revised: 5 Jan 2022
Date Written: November 2014
Many recently proposed, seemingly different factor models are closely related. In spanning tests, the q-factor model largely subsumes the Fama-French (2015, 2018) 5-and 6-factor models, and the q5 model captures the Stambaugh-Yuan (2017) model. The Stambaugh-Yuan factors are sensitive to their construction, and once replicated via the standard approach, are close to the q-factors, with correlations of 0.8 and 0.84. Finally, it seems difficult to motivate the Fama-French 5-factor model from valuation theory, which predicts a positive relation between the expected investment and the expected return.
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