AN examination of linear factor models in U.K. stock returns in the presence of dynamic trading

Jonathan Fletcher ()
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Jonathan Fletcher: University of Strathclyde

Review of Quantitative Finance and Accounting, 2024, vol. 63, issue 3, No 11, 1147 pages

Abstract: Abstract This study uses the approach of Ferson and Siegel, Rev Financ Stud 22:2735–2758 (2009), and Ferson, Siegel and Wang, J Financ Quant Anal, forthcoming, (2024) to examine the unconditional mean–variance efficiency, in the presence of conditioning information (UMV), of ten linear factor models in U.K. stock returns. The study finds that the UMV efficiency of all the multifactor models is strongly rejected in U.K. stock returns in two different sets of test assets. This rejection is mainly driven by allowing dynamic trading in the test assets and factors. The optimal use of conditioning information also has a significant impact in relative model comparison tests. In relative model comparison tests based on UMV efficiency, the best performing model is the eight-factor model of Chib and Zeng, J Bus Econ Stat 38:771–783 (2020) model.

Keywords: Multi-factor models; Asset pricing; Conditioning information; Dynamic trading (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11156-024-01286-0

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