Any Axes Are Allowed: A Characteristic-Axis Integral Diagnosis of Factor Models

Useong Shin

Papers from arXiv.org

Abstract: This paper extends the cap-axis integral diagnostic to general characteristic axes and measures factor-model pricing errors as bridge-alpha curves. A predetermined characteristic order generates prefix portfolios; subtracting equal-exposure aggregate portfolios gives zero-investment bridges indexed by cutoff p. The null is not a pointwise alpha test on selected deciles, but a zero-curve restriction on the restricted subspace generated by the characteristic order. In 1967-2024 CRSP data, value, profitability, investment, and momentum axes show systematic sign reversals. HML and CMA overcorrect significantly, whereas RMW and UMD largely flatten their axes. Axis-level pricing errors are nearly orthogonal to maximum-Sharpe gains.

Date: 2026-07
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