Charles A. Dice Center Working Paper No. 2018-10
99 Pages Posted: 5 Jun 2018 Last revised: 31 Oct 2018
Date Written: July 12, 2018
In a multiperiod investment framework, firms with high expected growth earn higher expected returns than firms with low expected growth, holding investment and expected profitability constant. This paper forms cross-sectional growth forecasts, and constructs an expected growth factor that yields an average premium of 0.82% per month (t =9.81). The q5 model, which augments the Hou-Xue-Zhang (2015) q-factor model with the new factor, shows strong explanatory power in the cross section, and outperforms other recently proposed factor models such as the Fama-French (2018) 6-factor model.
Keywords: The q5-Model, The q-Factor Model, The Expected Growth, The Investment CAPM, Factor Regressions, Anomalies
JEL Classification: G12, G14
Suggested Citation: Suggested Citation