The X-Value Factor
Discussion Paper on Business and Economics, University of Southern Denmark, 2/2020
41 Pages Posted: 17 Mar 2020
Date Written: February 19, 2020
Value normalizes size by book equity, which is a (relatively bad) proxy for expected cash flows. X-value normalizes size by the recursive out-of-sample expectation of each firm’s net income, based on its financials, with coefficients estimated by industry. Unlike value (but similarly constructed), the resulting X-value factor is unspanned by the Fama/French factors – market, size, value, investment, and profitability – individually or in different combinations (each factor and the market; all factors together; all except value). X-value spans the value and investment premiums with a Sharpe ratio of 0.57 (compared to 0.39 for value).
Keywords: Risk Premiums, Stock Returns, Fama and French, Cash Flow Forecasting, Out of Sample
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation