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Digesting Anomalies: An Investment Approach
Kewei Hou,Chen Xue,Lu Zhang +2 more
TLDR
In this paper, the authors proposed a new factor model that consists of the market factor, a size factor, an investment factor, and a return-on-equity factor.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 practiceread more
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Handbook of the Economics of Finance
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Dissecting Anomalies with a Five-Factor Model
TL;DR: In this paper, a five-factor model that adds profitability (RMW) and investment (CMA) factors to the three factor model of Fama and French (1993) suggests a shared story for several average-return anomalies.
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The Characteristics that Provide Independent Information about Average U.S. Monthly Stock Returns
TL;DR: The authors take up the challenge to identify the firm characteristics that provide independent information about average U.S. monthly stock returns by simultaneously including 94 characteristics in Fama-MacBeth regressions that avoid overweighting microcaps and adjust for data snooping bias.
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Characteristics Are Covariances: A Unified Model of Risk and Return
TL;DR: In this paper, the authors propose an instrumented principal component analysis (IPCA) model that allows for latent factors and time-varying loadings by introducing observable characteristics that instrument for the unobservable dynamic loadings.
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Shrinking the cross-section
TL;DR: In this paper, a robust stochastic discount factor (SDF) summarizing the joint explanatory power of a large number of cross-sectional stock return predictors is proposed.
References
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Multifactor Models Do Not Explain Deviations from the CAPM
TL;DR: In this article, a framework is developed showing that ex ante one should expect that CAPM deviations due to missing risk factors will be very difficult to statistically detect, in contrast, deviations resulting from non-risk based sources will be easy to detect.
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The New Issues Puzzle: Testing the Investment-Based Explanation
Evgeny Lyandres,Le Sun,Lu Zhang +2 more
TL;DR: In this paper, the authors explore empirically the investment-based hypothesis of new issues' underperformance and show that the Q-theory of investment and the real options theory imply a negative relation between real investment and expected returns.
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The Relation Between Corporate Financing Activities, Analysts' Forecasts and Stock Returns
TL;DR: In this article, the authors developed a comprehensive and parsimonious measure of corporate financing activities and document a negative relation between this measure and both future stock returns and future profitability, and analyzed the association between their measure of external financing and sell-side analysts' forecasts.
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In Search of Distress Risk
TL;DR: In this paper, the determinants of corporate failure and the pricing of financially distressed stocks using US data over the period 1963 to 2003 were explored and the most persistent firm characteristics, market capitalization, the market-book ratio, and equity volatility become relatively more significant.
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CAPM tests and alternative factor portfolio composition: getting the alphas right
Lieven De Moor,Piet Sercu +1 more