Charles A. Dice Center Working Paper No. 2018-03-03
52 Pages Posted: 6 Mar 2018 Last revised: 12 Jul 2018
Date Written: July 2018
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.
Keywords: The q-factor model, the Q5 model, factor spanning tests, the investment CAPM, factor investing
JEL Classification: G12, G14
Suggested Citation: Suggested Citation