What difference do new factor models make in portfolio allocation?

Frank J. Fabozzi, Dashan Huang, Fuwei Jiang and Jiexun Wang

Journal of International Money and Finance, 2024, vol. 140, issue C

Abstract: This paper compares the Hou-Xue-Zhang four-factor model with the Fama-French five-factor model from an investing perspective both in- and out-of-sample. Without margin requirements and model uncertainty, the Hou-Xue-Zhang model outperforms the Fama-French model. However, the outperformance could become negligible if an investor is subject to margin requirements and model uncertainty. The Hou-Xue-Zhang model shows similar power as the Fama-French model in describing the covariance matrix of asset returns. Overall, the two models do not make a difference for investing in a realistic setting.

Keywords: Portfolio allocation; Mean-variance analysis; Factor model; Asset pricing (search for similar items in EconPapers)
JEL-codes: C11 G11 G12 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:140:y:2024:i:c:s0261560623001985

DOI: 10.1016/j.jimonfin.2023.102997

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