36 Pages Posted: 29 Jun 2005
Date Written: August 11, 1998
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: 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