Which Factors

Fisher College of Business Working Paper No. 2018-03-003

Charles A. Dice Center Working Paper No. 2018-03-03

52 Pages Posted: 6 Mar 2018 Last revised: 12 Jul 2018

See all articles by Kewei Hou

Kewei Hou

Ohio State University (OSU) - Department of Finance

Haitao Mo

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration

Chen Xue

University of Cincinnati

Lu Zhang

Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

Date Written: July 2018

Abstract

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

Hou, Kewei and Mo, Haitao and Xue, Chen and Zhang, Lu, Which Factors (July 2018). Charles A. Dice Center Working Paper No. 2018-03-03. Available at SSRN: https://ssrn.com/abstract=3134771 or http://dx.doi.org/10.2139/ssrn.3134771

Kewei Hou

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-0552 (Phone)
614-292-2418 (Fax)

Haitao Mo

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration ( email )

Baton Rouge, LA 70803-6308
United States

Chen Xue

University of Cincinnati ( email )

College of Business Administration
Cincinnati, OH 45221
United States
(513) 556-7078 (Phone)

Lu Zhang (Contact Author)

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
585-267-6250 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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