Publication Type

Journal Article

Version

submittedVersion

Publication Date

2-2024

Abstract

This paper compares the Hou-Xue-Zhang four-factor model with the Fama-French five-factor model from an investing perspective both in- and out-of-sample. Without margin requirements and model uncertainty, the Hou-Xue-Zhang model outperforms the Fama-French model. However, the outperformance could become negligible if an investor is subject to margin requirements and model uncertainty. The Hou-Xue-Zhang model shows similar power as the Fama-French model in describing the covariance matrix of asset returns. Overall, the two models do not make a difference for investing in a realistic setting.

Keywords

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

Discipline

Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

Publication

Journal of International Money and Finance

Volume

140

First Page

1

Last Page

20

ISSN

0261-5606

Identifier

10.1016/j.jimonfin.2023.102997

Publisher

Elsevier

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1016/j.jimonfin.2023.102997

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