Digesting Anomalies: An Investment Approach

Hou, Kewei; Chen, Xue; Zhang, Lu

doi:10.1093/rfs/hhu068

Cited by 1,941 publications

(405 citation statements)

References 93 publications

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“…Aiming to assess the performance of the said model, they compared the performance of the proposed model to that of the three-factor model by Fama and French (1993) as well as that of the four-factor model by Carhart (1997), to explain 80 anomalies documented in the literature. Hou et al (2015) found that the proposed model performed better than the three-factor and four-factor models in explaining several of the significant anomalies.…”

Section: Introductionmentioning

confidence: 86%

“…Other characteristics also help explain returns, such as factors associated with expected profitability and a company's expected investment. Fama and French (2006, 2008, Hou, Xue and Zhang (2015) and Novy-Marx (2013) identified that profitability is positively related to average return. French (2006, 2008), Xing (2008) and Chen, Novy-Marx and Zhang (2010) documented the negative relation between company investment and return.…”

Section: Introductionmentioning

confidence: 97%

“…Fama and French (2015) verified that part of the variation in stock returns is left unexplained by the three-factor model they developed in 1993. Then, motivated by valuation theory (Fama & French, 2006), as well as by empirical evidence documented in the literature about the relation between return and profitability (Novy-Marx, 2013) and return and investment (Cooper, Gulen, & Shill, 2008;Lam & Wei, 2011;Li, Becker, & Rosenfeld, 2012;Lipson, Mortal, & Shill, 2011;Watanabe, Xu, Yao, & Yu, 2013;Xing, 2008), Fama and French (2015) and Hou et al (2015) added profitability and investment factors to the traditional asset pricing models. Fama and French (2015) added profitability and investment factors to their three-factor model, thus creating a five-factor model.…”

Section: Introductionmentioning

confidence: 99%

“…Finally, just like Xing (2008), Fama and French (2015) verified that, by adding profitability and investment factors, B/M factor turned out to be redundant in explaining returns. Hou et al (2015) added profitability and investment to market and size factors, thus creating an alternative four-factor model. Aiming to assess the performance of the said model, they compared the performance of the proposed model to that of the three-factor model by Fama and French (1993) as well as that of the four-factor model by Carhart (1997), to explain 80 anomalies documented in the literature.…”

Section: Introductionmentioning

confidence: 99%

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Applicability of Investment and Profitability Effects in Asset Pricing Models

2017

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ResumoEste estudo teve por objetivo investigar se investimento e rentabilidade são precificados e se explicam parcialmente as mudanças dos retornos das ações no mercado de capitais brasileiro, conforme o modelo de cinco fatores de Fama e French (2015). Por meio de regressões em série temporal e em cross-section, observou-se que B/M, momento e liquidez, são associados com os retornos das ações, enquanto que investimento e rentabilidade não apresentaram significância. Observou-se, também, que não existe prêmio por investimento no Brasil. Portanto, motivado pelo desempenho do B/M, do momento e da liquidez para o mercado brasileiro, bem como pelo fraco desempenho da rentabilidade e do investimento, pode-se constatar que o modelo de cinco fatores de Keene e Peterson (2007) apresentou desempenho superior a todos os outros modelos, especialmente quando comparado ao modelo de cinco fatores de Fama e French (2015).Palavras-chave: modelos de precificação de ativos; rentabilidade; investimento; liquidez. AbstractThis study aims to investigate whether investment and profitability are priced and if they partially explain the variations of stock returns in the Brazilian stock market, according to the Fama and French's (2015) five-factor model. By using time series and cross-section regression, we found that book-to-market, momentum and liquidity are associated with stock returns whereas investment and profitability were not significant. We also found that there is no investment premium in Brazil. Therefore, motivated by the importance of B/M, momentum and liquidity to the Brazilian stock market, as well as by the poor performance of profitability and investment, we document that Keene and Peterson's (2007) five-factor model is superior to all other models, especially the five-factor model by Fama and French (2015).

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Section: Introductionmentioning

confidence: 86%

Section: Introductionmentioning

confidence: 97%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Applicability of Investment and Profitability Effects in Asset Pricing Models

2017

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“…[2] However, recent studies have discovered that many other important patterns in average returns are left unexplained by the 3-factor model. Panel A of Table 1 (2015) find that the 4-factor q-model performs better than the FF5 model in US market [8]. Harshita, Singh, S. and Yadav, S. S.…”

Section: Introductionmentioning

confidence: 98%

A New Fama-French 5-Factor Model Based on SSAEPD Error and GARCH-Type Volatility

Zhou¹,

Li²

2016

JMF

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In this paper, we extend the 5-factor model in Fama and French (2015) with the non-Normal errors distribution of SSAEPD (Standardized Standard Asymmetric Exponential Power Distribution) in Zhu and Zinde-Walsh (2009) and the GARCHtype volatility. The focus is on finding out whether our new model can outperform the original Fama-French 5-factor model. We use Fama-French 25 value-weighted portfolios to conduct our research. The MLE is used to estimate the parameters. The LR test and KS test are used for model diagnostics. Models are compared by AIC. Empirical results show that with GARCH-type volatilities and non-normal errors, the Fama-French 5 factors are still alive. Our new model can successfully capture the skewness, fat-tailness and asymmetric kurtosis in the data and has better in-sample fit than the 5-factors model in Fama and French (2015). Our study provides an update to existing asset pricing literature and reference for investors.

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2021

Innovation and Financial Markets

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Digesting Anomalies: An Investment Approach

Cited by 1,941 publications

References 93 publications

Applicability of Investment and Profitability Effects in Asset Pricing Models

Applicability of Investment and Profitability Effects in Asset Pricing Models

A New Fama-French 5-Factor Model Based on SSAEPD Error and GARCH-Type Volatility

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