Which Factors?

Abstract

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Can mispricing explain the value premium?

“…Barillas and Shanken () argue that if an asset pricing model cannot price a factor excluded from that model, then a model augmented with that factor is a better model. Several recent studies use spanning regressions to evaluate factors (Barillas & Shanken, ; Gerakos & Linnainmaa, ; Hou, Mo, Xue, & Zhang, ). To gauge the marginal value of a new factor, we estimate a spanning regression by regressing that factor on the existing factors in an asset pricing model and test the significance of the model's alpha.…”

Idiosyncratic momentum and the cross‐section of stock returns: Further evidence

“…We argue that two potential reasons may offer an explanation for this phenomenon. First, may contain only a small portion of common information about profitability and investment growth, which can be attributed to the relatively mediocre predictability of past profitability and the weak predictability of investment for expected profitability and investment growth (e.g., Fama & French, ; Hou, Mo, Xue, & Zhang, ; Hou & van Dijk, ). Therefore, it cannot give rise to a statistically significant reduction in the predictability of idiosyncratic returns.…”

“…In addition, the joint hypothesis of George et al () indicates that stocks with low current investment and high idiosyncratic momentum should earn higher returns than those with high current investment and low idiosyncratic momentum. Hou et al () document that past profitability is an appropriate proxy for expected profitability. As such, we also examine whether stocks with high profitability and idiosyncratic momentum earn higher returns than those with low profitability and idiosyncratic momentum.…”

Betas versus characteristics: A practical perspective

“…The second aim of our paper is to evaluate which characteristics provide independent incremental effects for the cross‐section of stock returns and which characteristics are subsumed. Recent developments of new asset pricing models based on characteristic‐sorted factors have led to a renewed interest in factor comparisons seeking to identify which factors provide the best description of expected returns (see Barillas & Shaken, 2018; Ahmed, Bu, & Tsvetanov, 2019; Hou, Mo, Xue, & Zhang, 2019). The idea behind most of these tests is to check whether a factor provides marginal explanatory power relative to the other factors considered in current or previous models.…”