Winners from Winners: A Tale of Risk Factors

Siddhartha Chib (), Lingxiao Zhao () and Guofu Zhou ()
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Siddhartha Chib: Olin School of Business, Washington University in St. Louis, St. Louis, Missouri 63130
Lingxiao Zhao: Peking University HSBC Business School, Shenzhen 518055, P. R. China
Guofu Zhou: Olin School of Business, Washington University in St. Louis, St. Louis, Missouri 63130

Management Science, 2024, vol. 70, issue 1, 396-414

Abstract: Starting from twelve distinct factors from the recent literature, plus twelve principal components (PCs) of anomalies unexplained by the initial factors, a Bayesian comparison of approximately seventeen million models in terms of marginal likelihoods and posterior model probabilities shows that {Mkt, MOM, IA, ROE, MGMT, PERF, PEAD, FIN}, plus the nonconsecutive principal components, { PC 1 , PC 5 , PC 7 } are the best supported risk factors. Pricing tests and annualized out-of-sample Sharpe ratios for tangency portfolios suggest that this asset pricing model should be used for computing expected returns, assessing investment strategies and building portfolios.

Keywords: Bayesian model comparison; factor models; anomaly; stochastic discount factor; portfolio analysis (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:1:p:396-414

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