Neoclassical Factors

39 Pages Posted: 25 Jun 2007 Last revised: 16 Sep 2009

Lu Zhang

Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

Long Chen

Cheung Kong Graduate School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: March 2008

Abstract

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

Zhang, Lu and Chen, Long, Neoclassical Factors (March 2008). Ross School of Business Paper No. 1088; AFA 2009 San Francisco Meetings Paper. Available at SSRN: https://ssrn.com/abstract=994962 or http://dx.doi.org/10.2139/ssrn.994962

Lu Zhang

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
585-267-6250 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Long Chen (Contact Author)

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China

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