Integrating Factor Models

87 Pages Posted: 16 Sep 2021 Last revised: 27 Jan 2022

See all articles by Doron Avramov

Doron Avramov

Interdisciplinary Center (IDC) Herzliyah

Si Cheng

Chinese University of Hong Kong - Department of Finance

Lior Metzker

Hebrew University of Jerusalem

Stefan Voigt

University of Copenhagen; Danish Finance Institute

Date Written: December 15, 2021

Abstract

This paper develops a comprehensive framework to address uncertainty about the correct factor model. Asset pricing inferences draw on a composite model that integrates over competing factor models weighted by posterior probabilities. Evidence shows that unconditional models record near-zero probabilities, while post-earnings announcement drift, quality-minus-junk, and intermediary capital are potent factors in conditional asset pricing. The integrated model tilts away from the subsequently underperforming factors, and delivers robust strategies. Model uncertainty makes equities appear considerably riskier, while model disagreement about expected returns spikes during crash episodes. Disagreement spans all return components involving mispricing, factor loadings, and risk premia.

Keywords: Factor models, Model integration, Posterior probability, Stock return predictability, Mispricing

JEL Classification: C11, C12, C52, G12

Suggested Citation

Avramov, Doron and Cheng, Si and Metzker, Lior and Voigt, Stefan, Integrating Factor Models (December 15, 2021). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3924337 or http://dx.doi.org/10.2139/ssrn.3924337

Doron Avramov

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

HOME PAGE: http://faculty.idc.ac.il/davramov/

Si Cheng (Contact Author)

Chinese University of Hong Kong - Department of Finance ( email )

12/F, Cheng Yu Tung Building
No.12, Chak Cheung Street
Shatin, N.T.
Hong Kong

HOME PAGE: http://www.bschool.cuhk.edu.hk/staff/cheng-si/

Lior Metzker

Hebrew University of Jerusalem ( email )

Mount Scopus
Jerusalem, Jerusalem 91905
Israel

Stefan Voigt

University of Copenhagen ( email )

Ă˜ster Farimagsgade 5, Bygn 26
Copenhagen, 1353
Denmark

HOME PAGE: http://voigtstefan.me

Danish Finance Institute ( email )

Copenhagen

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
605
Abstract Views
1,676
rank
62,479
PlumX Metrics