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Which Factors?

Author

Listed:
  • Kewei Hou
  • Haitao Mo
  • Chen Xue
  • Lu Zhang

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 q5 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.

Suggested Citation

  • Kewei Hou & Haitao Mo & Chen Xue & Lu Zhang, 2019. "Which Factors?," Review of Finance, European Finance Association, vol. 23(1), pages 1-35.
    • Handle: RePEc:oup:revfin:v:23:y:2019:i:1:p:1-35.
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    3. Oh, Jong-Min, 2017. "Absorptive capacity, technology spillovers, and the cross-section of stock returns," Journal of Banking & Finance, Elsevier, vol. 85(C), pages 146-164.
    4. Gu, Lifeng, 2016. "Product market competition, R&D investment, and stock returns," Journal of Financial Economics, Elsevier, vol. 119(2), pages 441-455.

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    More about this item

    Keywords

    Factor models; Spanning tests; The investment CAPM; Valuation theory;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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