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Which factor model? A systematic return covariation perspective

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  • Ahmed, Shamim
  • Bu, Ziwen
  • Symeonidis, Lazaros
  • Tsvetanov, Daniel

Abstract

We examine which factor model best captures systematic return covariation by focusing on the economic implications for portfolio risk control. The pairwise variance equality test and the model confidence set procedure suggest that the Fama and French (2015) five-factor model, the Barillas and Shanken (2018) six-factor model, and the Fama and French (2018) six-factor model are the top performers for the factor model-implied minimum risk portfolios in the out-of-sample. When it comes to the minimum tracking error portfolios, the Barillas and Shanken (2018) six-factor model and the Fama and French (2018) six-factor model are the overall winners in the horse race.

Suggested Citation

  • Ahmed, Shamim & Bu, Ziwen & Symeonidis, Lazaros & Tsvetanov, Daniel, 2023. "Which factor model? A systematic return covariation perspective," Journal of International Money and Finance, Elsevier, vol. 136(C).
  • Handle: RePEc:eee:jimfin:v:136:y:2023:i:c:s0261560623000669
    DOI: 10.1016/j.jimonfin.2023.102865
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    More about this item

    Keywords

    Asset pricing model; Factor model; Model evaluation; Portfolio selection; Out-of-sample;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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