Winners from Winners: A Tale of Risk Factors

29 Pages Posted: 17 Nov 2019

See all articles by Siddhartha Chib

Siddhartha Chib

Washington University in St. Louis - John M. Olin Business School

Lingxiao Zhao

Washington University in St. Louis, College of Arts & Sciences, Department of Economics

Dashan Huang

Singapore Management University - Lee Kong Chian School of Business

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School; China Academy of Financial Research (CAFR)

Date Written: October 30, 2019

Abstract

Taking the union of the risk factors recently proposed by Fama and French (1993, 2015, 2018), Hou, Xue, and Zhang (2015), Stambaugh and Yuan (2017), and Daniel, Hirshleifer, and Sun (2019), a pool we refer to as the “winners”, we ask what collection of winners from winners emerge when each factor is allowed to play the role of a risk factor, or a non-risk factor. Our comparison of 4,095 models shows that a six factor model consisting of Mkt, SMB, MOM, ROE, MGMT, and PEAD as risk factors has the largest Bayesian posterior probability. Moreover, this collection displays superior out-of-sample predictive performance, higher Sharpe ratios, and greater ability in pricing anomalies, than the preceding models. These results suggest that both fundamental and behavioral factors play an important role in explaining the cross-section of expected equity returns.

Keywords: Model comparison, Risk factors, Marginal Likelihoods

JEL Classification: G10, G12

Suggested Citation

Chib, Siddhartha and Zhao, Lingxiao and Huang, Dashan and Zhou, Guofu, Winners from Winners: A Tale of Risk Factors (October 30, 2019). Available at SSRN: https://ssrn.com/abstract=3478223 or http://dx.doi.org/10.2139/ssrn.3478223

Siddhartha Chib

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-4657 (Phone)
314-935-6359 (Fax)

Lingxiao Zhao (Contact Author)

Washington University in St. Louis, College of Arts & Sciences, Department of Economics ( email )

1 Brooking Drive
Campus Box 1208
ST LOUIS, MO 63130
United States

Dashan Huang

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore

HOME PAGE: http://dashanhuang.weebly.com/

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School ( email )

Washington University
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6384 (Phone)
314-658-6359 (Fax)

HOME PAGE: http://apps.olin.wustl.edu/faculty/zhou/

China Academy of Financial Research (CAFR)

Shanghai Advanced Institute of Finance
Shanghai P.R.China, 200030
China

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