54 Pages Posted: 2 Oct 2015 Last revised: 28 Mar 2017
Date Written: March 1, 2017
Our goal is to develop insights about the max squared Sharpe ratio for model factors as a metric for ranking asset-pricing models. We consider nested and non-nested models. The nested models are the CAPM, the three-factor model of Fama and French (1993), the five-factor extension in Fama and French (2015), and a six-factor model that adds a momentum factor. The non-nested models examine three issues about factor choice in the six-factor model: (i) cash profitability versus operating profitability as the variable used to construct profitability factors, (ii) long-short spread factors versus excess return factors, and (iii) factors that use small or big stocks versus factors that use both.
Keywords: Five-factor model
JEL Classification: G12
Suggested Citation: Suggested Citation
Fama, Eugene F. and French, Kenneth R., Choosing Factors (March 1, 2017). Fama-Miller Working Paper ; Tuck School of Business Working Paper No. 2668236; Chicago Booth Research Paper No. 16-17. Available at SSRN: https://ssrn.com/abstract=2668236 or http://dx.doi.org/10.2139/ssrn.2668236