Characteristics-Based Factors

65 Pages Posted: 6 Feb 2018 Last revised: 22 Jan 2020

See all articles by Zhuo Chen

Zhuo Chen

Tsinghua University; Tsinghua University - PBC School of Finance

Bibo Liu

Tsinghua University - PBC School of Finance

Huijun Wang

University of Melbourne

Zhengwei Wang

Tsinghua University - PBC School of Finance

Jianfeng Yu

Tsinghua University - PBC School of Finance

Date Written: January 15, 2020

Abstract

Recent studies have proposed a large set of powerful characteristics-based factors in the stock market. This study examines the pricing of these factors using portfolios that are formed by directly sorting stocks based on their exposure to these factors. These beta-sorted portfolios have very large ex post factor beta spreads. However, the return spreads between high- and low-beta firms are typically tiny and insignificant (on average, 0.01% per month). More important, we show that the differences between factor-adjusted returns and characteristics-adjusted returns for these beta-sorted portfolios are both economically and statistically significant at about 0.41% per month. In addition, factor-adjusted returns and characteristics-adjusted returns can be significantly different for a large number of anomalies and mutual funds. Our results thus urge cautions regarding the common practice of using factor models such as adjusting for investment style, performance evaluation, and performance attribution.

Keywords: Factor, Beta, Characteristics, Performance Evaluation, Anomalies

JEL Classification: G12

Suggested Citation

Chen, Zhuo and Liu, Bibo and Wang, Huijun and Wang, Zhengwei and Yu, Jianfeng, Characteristics-Based Factors (January 15, 2020). Available at SSRN: https://ssrn.com/abstract=3112835 or http://dx.doi.org/10.2139/ssrn.3112835

Zhuo Chen

Tsinghua University ( email )

43 Chengfu Road
Beijing, 100083
China

Tsinghua University - PBC School of Finance

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

Bibo Liu

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

Huijun Wang

University of Melbourne

198 Berkeley Street
Carlton, Victoria 3053
Australia

Zhengwei Wang

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China

Jianfeng Yu (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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