What Difference Do New Factor Models Make in Portfolio Allocation?

54 Pages Posted: 22 Mar 2016 Last revised: 22 Sep 2016

Frank J. Fabozzi

EDHEC Business School

Dashan Huang

Singapore Management University - Lee Kong Chian School of Business

Jiexun Wang

Independent

Date Written: September 21, 2016

Abstract

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

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

Frank J. Fabozzi

EDHEC Business School ( email )

France
215 598-8924 (Phone)

Dashan Huang (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore

HOME PAGE: http://sites.google.com/site/dashanhuang2012/

Jiexun Wang

Independent ( email )

Singapore

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