The Alpha Factor Asset Pricing Model: A Parable

36 Pages Posted: 29 Jun 2005

See all articles by Wayne E. Ferson

Wayne E. Ferson

University of Southern California; National Bureau of Economic Research (NBER)

Sergei Sarkissian

McGill University; University of Edinburgh

Timothy T. Simin

Pennsylvania State University

Date Written: August 11, 1998

Abstract

Recent empirical studies use the returns of attribute-sorted portfolios of common stocks as if they represent risk factors in an asset pricing model. If the attributes are chosen following an empirically observed relation to the cross-section of stock returns, such portfolios will appear to be useful risk factors, even when the attributes are completely unrelated to risk. We illustrate this result using a parable and argue that the moral of the story is important in practice.

Keywords: Asset pricing, Factor models, Cross-sectional regressions, Arbitrage portfolios, Anomalies

JEL Classification: C5, G12

Suggested Citation

Ferson, Wayne E. and Sarkissian, Sergei and Simin, Timothy T., The Alpha Factor Asset Pricing Model: A Parable (August 11, 1998). Available at SSRN: https://ssrn.com/abstract=749005 or http://dx.doi.org/10.2139/ssrn.749005

Wayne E. Ferson (Contact Author)

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

HOME PAGE: http://www-rcf.usc.edu/~ferson/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Sergei Sarkissian

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada
514-398-4876 (Phone)
514-398-3876 (Fax)

HOME PAGE: http://sergei-sarkissian.com

University of Edinburgh

29 Buccleuch Pl.
Edinburgh, Scotland EH8 9JS
United Kingdom

Timothy T. Simin

Pennsylvania State University ( email )

University Park, PA 16802
United States
814-865-3457 (Phone)

HOME PAGE: http://timsimin.net

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