54 Pages Posted: 22 Mar 2016 Last revised: 22 Sep 2016
Date Written: September 21, 2016
This paper examines the economic implications of new factor models and shows that the Hou, Xue, and Zhang (HXZ, 2015a) four-factor model outperforms the Fama and French (FF5, 2015a) five-factor model for investing in anomalies in- and out-of-sample. The difference in certainty-equivalent returns between the two models can be more than 6% per year under modest model uncertainty and margin requirements. The outperformance of the HXZ model appears to come from its better ability to describe the mean rather than the covariance matrix of asset returns.
Keywords: Portfolio allocation, Mean-variance analysis, Factor model, Asset pricing
JEL Classification: G11, G12, C11
Suggested Citation: Suggested Citation
Fabozzi, Frank J. and Huang, Dashan and Wang, Jiexun, What Difference Do New Factor Models Make in Portfolio Allocation? (September 21, 2016). Available at SSRN: https://ssrn.com/abstract=2752822 or http://dx.doi.org/10.2139/ssrn.2752822