Digesting Anomalies: An Investment Approach

Kewei Hou, Chen Xue and Lu Zhang ()
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Chen Xue: University of Cincinnati

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: Motivated from investment-based asset pricing, we propose a new factor model that consists of the market factor, a size factor, an investment factor, and a return-on-equity factor. The new model [i] outperforms the Carhart (1997) four-factor model in pricing portfolios formed on earnings surprise, idiosyncratic volatility, financial distress, equity issues, as well as on investment and return-on-equity; [ii] performs similarly as the Carhart model in pricing portfolios on momentum as well as on size and book-to-market; but [iii] underperforms in pricing the total accrual deciles. Our model's performance, combined with its clear economic intuition, suggests that it can serve as a new workhorse model for academic research and investment management practice.

JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2012-12
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Citations: View citations in EconPapers (9)

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Working Paper: Digesting Anomalies: An Investment Approach (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2012-21

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