DIGESTING THREE-FACTOR MODEL

Weige Huang ()
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Weige Huang: Wenlan School of Business, Zhongnan University of Economics and Law, 182 Nanhu Ave., Wuhan 430073, P. R. China

The Singapore Economic Review (SER), 2025, vol. 70, issue 04, 1021-1050

Abstract: This paper digests three-factor model by exploring the average impacts of factors on portfolio returns and how factors interact with each other. To do this, we use SHapley Additive exPlanations method (SHAP) to interpret the results obtained by XGBoost. We find that the factors have different impacts on portfolio returns and interact with each other in different ways. We also find that the average impacts of factors on portfolio returns are similar before and after the publication of the three-factor model and the 2008 financial crisis but the interactions between factors vary across times.

Keywords: Asset pricing; factor model; machine learning; SHAP; XGBoost (search for similar items in EconPapers)
JEL-codes: C10 C71 G12 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1142/S0217590822480022

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