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Neoclassical Factors

Author

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  • Long Chen
  • Lu Zhang

Abstract

Building on neoclassical reasoning, we propose a new multi-factor model that consists of the market factor and factor mimicking portfolios based on investment and productivity. The neo- classical three-factor model outperforms traditional factor models in explaining the average returns across testing portfolios formed on momentum, financial distress, investment, profitability, accruals, net stock issues, earnings surprises, and asset growth. Most intriguingly, winners have higher loadings than losers on both the low-minus-high investment factor and the high- minus-low productivity factor, which in turn help explain momentum profits.

Suggested Citation

  • Long Chen & Lu Zhang, 2007. "Neoclassical Factors," NBER Working Papers 13282, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:13282
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    Cited by:

    1. Urs von Arx & Andreas Ziegler, 2008. "The Effect of CSR on Stock Performance: New Evidence for the USA and Europe," CER-ETH Economics working paper series 08/85, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    2. Hsu, Po-Hsuan, 2009. "Technological innovations and aggregate risk premiums," Journal of Financial Economics, Elsevier, vol. 94(2), pages 264-279, November.
    3. Benjamin Chabot & Eric Ghysels & Ravi Jagannathan, 2009. "Momentum Cycles and Limits to Arbitrage Evidence from Victorian England and Post-Depression US Stock Markets," NBER Working Papers 15591, National Bureau of Economic Research, Inc.
    4. Jin Ginger Wu & Lu Zhang & X. Frank Zhang, 2007. "Understanding the Accrual Anomaly," NBER Working Papers 13525, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • 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
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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