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
Citation
Fabozzi, Frank J.; HUANG, Dashan; Jiang, Fuwei; and WANG, Jiexun.
What difference do the new factor models make in portfolio allocation?. (2024). Journal of International Money and Finance. 140, 1-20.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/5232
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1016/j.jimonfin.2023.102997