The investment manifesto

Xiaoji Lin and Lu Zhang ()

Journal of Monetary Economics, 2013, vol. 60, issue 3, 351-366

Abstract: A deep-ingrained doctrine in asset pricing says that if an empirical characteristic-return relation is consistent with investor “rationality,” the relation must be “explained” by a risk (factor) model. The investment approach questions the doctrine. Factors formed on characteristics are not necessarily risk factors; characteristics-based factor models are linear approximations of firm-level investment returns. The evidence that characteristics dominate covariances in horse races does not necessarily mean mispricing; measurement errors in covariances are likely to blame. Most important, risks do not “determine” expected returns; the investment approach is no more and no less “causal” than the consumption approach in “explaining” anomalies.

Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:60:y:2013:i:3:p:351-366

DOI: 10.1016/j.jmoneco.2013.01.001

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