Review of Finance, Forthcoming
Charles A. Dice Center Working Paper No. 2018-03-03
38 Pages Posted: 22 Oct 2018
Date Written: September 2018
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