Publication Type

Working Paper

Publication Date

9-2016

Abstract

This paper examines the economic implications of new factor models and shows that the Hou, Xue, and Zhang (HXZ, 2015a) four-factor model outperforms the Fama and French (FF5, 2015a) five-factor model for investing in anomalies in- and out-of-sample. The difference in certainty-equivalent returns between the two models can be more than 6% per year under modest model uncertainty and margin requirements. The outperformance of the HXZ model appears to come from its better ability to describe the mean rather than the covariance matrix of asset returns.

Keywords

Portfolio allocation, Mean-variance analysis, Factor model, Asset pricing

Discipline

Finance | Finance and Financial Management

Research Areas

Finance

First Page

1

Last Page

54

Identifier

10.2139/ssrn.2752822

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Additional URL

https://dx.doi.org/10.2139/ssrn.2752822

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