Download This PaperWhich 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
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: Suggested Citation
Kewei Hou
Ohio State University (OSU) - Department of Finance ( email )
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United States
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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
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