Which Factors?

Review of Finance, Forthcoming

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

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

38 Pages Posted: 22 Oct 2018

See all articles by Kewei Hou

Kewei Hou

Ohio State University (OSU) - Department of Finance

Haitao Mo

E. J. Ourso College of Business, Louisiana State University

Chen Xue

University of Cincinnati

Lu Zhang, 张橹

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

Date Written: September 2018

Abstract

Many recently proposed, seemingly different factor models are closely related. In spanning tests, the q-factor model largely subsumes the Fama-French 5- and 6-factor models, and the q^5 model subsumes the Stambaugh-Yuan 4-factor model. Their “mispricing” factors are sensitive to the construction procedure, and once replicated via the traditional approach, are close to the q-factors, with correlations of 0.8 and 0.84. Finally, consistent with the investment CAPM, valuation theory predicts a positive relation between the expected investment and the expected return.

Keywords: The q-factor model, the q^5 model, spanning regressions, the investment CAPM

JEL Classification: G12, G14

Suggested Citation

Hou, Kewei and Mo, Haitao and Xue, Chen and Zhang, Lu, Which Factors? (September 2018). Review of Finance, Forthcoming; Fisher College of Business Working Paper No. 2018-03-003; Charles A. Dice Center Working Paper No. 2018-03-03. Available at SSRN: https://ssrn.com/abstract=3258579

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

E. J. Ourso College of Business, Louisiana State University ( email )

E. J. Ourso College of Business
Louisiana State University
Baton Rouge, LA 70803
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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