The X-Value Factor

Discussion Paper on Business and Economics, University of Southern Denmark, 2/2020

41 Pages Posted: 17 Mar 2020

See all articles by Thiago de Oliveira Souza

Thiago de Oliveira Souza

University of Southern Denmark; Danish Finance Institute

Multiple version iconThere are 2 versions of this paper

Date Written: February 19, 2020

Abstract

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

de Oliveira Souza, Thiago, The X-Value Factor (February 19, 2020). Discussion Paper on Business and Economics, University of Southern Denmark, 2/2020, Available at SSRN: https://ssrn.com/abstract=3540903 or http://dx.doi.org/10.2139/ssrn.3540903

Thiago De Oliveira Souza (Contact Author)

University of Southern Denmark ( email )

Campusvej 55
DK-5230 Odense, 5000
Denmark

Danish Finance Institute ( email )

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