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Model scan of factors in U.K. stock returns

Author

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  • Jonathan Fletcher
  • Andrew Marshall
  • Michael O’Connell

Abstract

We use the Bayesian model scan approach of Chib, S., X. Zeng, and L. Zhao. 2020. ‘On Comparing Asset Pricing Models.’ The Journal of Finance 75 (1): 551–577. https://doi.org/10.1111/jofi.12854, and Chib, S., L. Zhao, and G. Zhou. 2023. ‘Winners from Winners: A Tale of Risk Factors.’ Management Science to examine which are the best performing models in a set of 12 candidate factors in U.K. stock returns. We find that a five-factor model has the highest posterior probability across the whole sample period but the posterior probability is low. The best factor model outperforms traditional factor models using a number of metrics. However the best model performs poorly in pricing a set of anomaly portfolios.

Suggested Citation

  • Jonathan Fletcher & Andrew Marshall & Michael O’Connell, 2024. "Model scan of factors in U.K. stock returns," The European Journal of Finance, Taylor & Francis Journals, vol. 30(13), pages 1548-1561, September.
    • Handle: RePEc:taf:eurjfi:v:30:y:2024:i:13:p:1548-1561
    DOI: 10.1080/1351847X.2024.2312203
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