39 Pages Posted: 25 Jun 2007 Last revised: 16 Sep 2009
Date Written: March 2008
We propose a new multifactor model that consists of the market factor and factor mimicking portfolios based on investment and productivity motivated from neoclassical reasoning. The neoclassical three-factor model goes a long way in explaining the average returns across testing portfolios formed on momentum, financial distress, investment, profitability, net stock issues, and valuation ratios. In particular, winners have higher loadings than losers on both the low-minus-high investment factor and the high-minus-low productivity factor. We suggest that the neoclassical model is a good start to understanding the cross-sectional variations of average stock returns.
Keywords: The cross-section of returns, anomalies, neoclassical economics, factor regressions
JEL Classification: E44, G12, G14
Suggested Citation: Suggested Citation