Winners from Winners: A Tale of Risk Factors

51 Pages Posted: 17 Nov 2019 Last revised: 15 Jun 2022

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 1, 2022

Abstract

Starting from the twelve distinct factors from Fama and French (1993, 2015, 2018), Hou, Xue, and Zhang (2015), Stambaugh and Yuan (2017), and Daniel, Hirshleifer, and Sun (2020), plus twelve principal components of anomalies unexplained by the initial factors, a Bayesian comparison of approximately 17 million models in terms of marginal likelihoods and posterior model probabilities shows that {Mkt, MOM, IA, ROE, MGMT, PERF, PEAD, FIN} plus the nonconsecutive principal components, {PC1, PC5, PC7} are the best supported risk-factors. Pricing tests and annualized out-of-sample Sharpe ratios for tangency portfolios suggest that this asset pricing model should be used for computing expected returns, assessing investment strategies and building portfolios.

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 1, 2022). 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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