A Comparison of New Factor Models

Kewei Hou, Chen Xue and Lu Zhang ()
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Kewei Hou: OH State University
Chen Xue: University of Cincinnati

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: This paper compares the Hou, Xue, and Zhang (2014) q-factor model and the Fama and French (2014a) five-factor model on both conceptual and empirical grounds. Four concerns cast doubt on the five-factor model: The internal rate of return often correlates negatively with the one-period-ahead expected return; the value factor seems redundant in the data; the expected investment tends to correlate positively with the one-period-ahead expected return; and past investment is a poor proxy for the expected investment. Empirically, the four-factor q-model outperforms the five-factor model, especially in capturing price and earnings momentum and profitability anomalies.

JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2015-01
New Economics Papers: this item is included in nep-fmk and nep-ger
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Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2015-05

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