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Too Many Factors! Do We Need Them All?

Soosung Hwang

Sungkyunkwan University - Department of Economics

Chensheng Lu

March 2007

We investigate more than a dozen of factors formed on firm characteristics and risk measures that have been claimed to be able to explain cross-sectional asset returns in the literature. In accordance to Fama and French (1993, 1996a), we use these factors in asset pricing, and show that the market portfolio, liquidity and coskewness explain the stock returns as well as the famous Fama-French three factors with momentum. In particular, in most sample periods tested, individual stocks' alphas are insignificant with only two factors, market portfolio and liquidity; in addition, many factors are redundant in asset pricing and are likely to come from data-mining.

Number of Pages in PDF File: 45

Keywords: Asset Price Testing, Average F test, Data-Mining, Empirical Factors

JEL Classification: G12, G14

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Date posted: March 20, 2007  

Suggested Citation

Hwang, Soosung and Lu, Chensheng, Too Many Factors! Do We Need Them All? (March 2007). Available at SSRN: https://ssrn.com/abstract=972022 or http://dx.doi.org/10.2139/ssrn.972022

Contact Information

Soosung Hwang
Sungkyunkwan University - Department of Economics ( email )
25-2 Sungkyunkwan-ro
110-745 Seoul
+82 (0)2 760 0489 (Phone)
+82 (0)2 744 5717 (Fax)
No contact information is available for Chensheng Lu
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