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Comparing factor models with price-impact costs

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  • Li, Sicong
  • DeMiguel, Victor
  • Martín-Utrera, Alberto

Abstract

We propose a formal statistical test to compare asset-pricing models in the presence of price impact. In contrast to the case without trading costs, we show that in the presence of price-impact costs different models may be best at spanning the investment opportunities of different investors depending on their absolute risk aversion. Empirically, we find that the five-factor model of Hou et al. (2021), the six-factor model of Fama and French (2018) with cash-based operating profitability, and a high-dimensional model are best at spanning the investment opportunities of investors with high, medium, and low absolute risk aversion, respectively.

Suggested Citation

  • Li, Sicong & DeMiguel, Victor & Martín-Utrera, Alberto, 2024. "Comparing factor models with price-impact costs," Journal of Financial Economics, Elsevier, vol. 162(C).
    • Handle: RePEc:eee:jfinec:v:162:y:2024:i:c:s0304405x24001727
    DOI: 10.1016/j.jfineco.2024.103949
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