Which Factors?. (17th October 2018)

• Record Type: Journal Article
• Authors: Hou, Kewei; Mo, Haitao; Xue, Chen; Zhang, Lu
• Is Part Of: Review of finance. Volume 23:Number 1(2019)
• Page Start: 1
• Page End: 35
• Publication Date: 2018-10-17
• Subjects: G12 -- G14; Factor models -- Spanning tests -- The investment CAPM -- Valuation theory; Finance -- Europe -- Periodicals; Financiën; Finance; Periodicals; 332.09405
• DOI: 10.1093/rof/rfy032
• Languages: English
• ISSNs: 1572-3097

Abstract

Abstract: Many recently proposed, seemingly different factor models are closely related. In spanning tests, the q -factor model largely subsumes the Fama–French five- and six-factor models, and the q 5 model subsumes the Stambaugh–Yuan four-factor model. Their "mispricing" factors are sensitive to the construction procedure, and once replicated via the traditional approach, are close to the q -factors, with correlations of 0.8 and 0.84. Finally, consistent with the investment CAPM, valuation theory predicts a positive relation between the expected investment and the expected return.