Winners from Winners: A Tale of Risk Factors

43 Pages Posted: 17 Nov 2019 Last revised: 18 Sep 2021

See all articles by Siddhartha Chib

Siddhartha Chib

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

Lingxiao Zhao

Peking University HSBC Business School

Guofu Zhou

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

Date Written: June 30, 2021

Abstract

Starting from the twelve distinct risk factors in four well-established asset pricing models, a pool we refer to as the winners, we construct and compare 4,095 asset pricing models and find that the model with the risk factors, Mkt, SMB, MOM, ROE, MGMT, and PEAD, performs the best in terms of Bayesian posterior probability, out-of-sample predictability, and Sharpe ratio. A more extensive model comparison of 8,388,607 models, constructed from the twelve winners plus eleven principal components of anomalies unexplained by the winners, shows the benefit of incorporating information in genuine anomalies in explaining the cross-section of expected equity returns.

Keywords: Model comparison, Factor models, Anomaly, Discount factor, Portfolio analysis

JEL Classification: G12, C11, C12, C52, C58

Suggested Citation

Chib, Siddhartha and Zhao, Lingxiao and Zhou, Guofu, Winners from Winners: A Tale of Risk Factors (June 30, 2021). 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)

Peking University HSBC Business School

Peking University HSBC Business School (PHBS)
University Town, Nanshan District
Shenzhen
China

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/

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