Digesting Anomalies: An Investment Approach

Kewei Hou, Chen Xue and Lu Zhang ()

No 18435, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Motivated from investment-based asset pricing, we propose a new factor model consisting of the market factor, a size factor, an investment factor, and a return on equity factor. The new factor model outperforms the Carhart four-factor model in pricing portfolios formed on earnings surprise, idiosyncratic volatility, financial distress, net stock issues, composite issuance, as well as on investment and return on equity. The new model performs similarly as the Carhart model in pricing portfolios formed on size and momentum, abnormal corporate investment, as well as on size and book-to-market, but underperforms in pricing the total accrual deciles. The new model's performance, combined with its clear economic intuition, suggests that it can be used as a new workhorse model for academic research and investment management practice.

JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2012-10
Note: AP CF EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published as Kewei Hou & Chen Xue & Lu Zhang, 2015. "Digesting Anomalies: An Investment Approach," Review of Financial Studies, vol 28(3), pages 650-705.

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Working Paper: Digesting Anomalies: An Investment Approach (2012)
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