Do the production-based factors capture the time-varying patterns in stock returns?

Hankil Kang, Jangkoo Kang and Changjun Lee

Emerging Markets Review, 2013, vol. 15, issue C, 122-135

Abstract: As a summarization of previously suggested production-based approaches, Chen et al. (2010) propose two production-based factors. We examine whether the proposed factors explain the time-varying patterns in stock returns, captured by the common conditioning variables. With a variety of test portfolios, we find that the fitted conditional expected return (fit) is always statistically significant in the presence of the production-based factors. Moreover, when the fit is included in the analysis, the magnitude of the production-based factors becomes consistently smaller and the fit drives out the significance of the production-based factors. Our empirical results cast some doubt on the validity of the production-based model as a conditional benchmark for risk adjustment.

Keywords: Production-based model; Chen, Novy-Marx, and Zhang three-factor model; Conditional asset pricing model; Expected return (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ememar:v:15:y:2013:i:c:p:122-135

DOI: 10.1016/j.ememar.2013.01.002

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