Publication Type
Working Paper
Version
submittedVersion
Publication Date
10-2018
Abstract
In this paper, we examine the pricing errors (PEs) of three kinds of factor models: a) six well known ones– the CAPM, the Fama-French three-factor model, the Carhart four-factor model, the Fama-French five-factor model, the Hou-Xue-Zhang Q-factor model, and the Stambaugh-Yuan mispricing-factor model; b) principal component factors of sixty-two anomalies; c) extracted statistical factors. We find that there is a systematic PE reversal pattern. A spread portfolio that buys stocks in the bottom PE decile and sells stocks in the top PE decile earns significant abnormal returns across all the models, implying that none of them is adequate in explaining the cross section of stock returns. Moreover, the differences between either the PEs or the PE spread portfolios are virtually zero, implying that current factor models improve little beyond the CAPM at pricing individual stock returns. Of the economic forces, the reversal is partially driven but cannot be fully explained by limits-to-arbitrage, lottery demand, and expectation extrapolation.
Keywords
Pricing error, Characteristic, Lottery, Expectation extrapolation, Limits-to-arbitrage
Discipline
Corporate Finance | Finance and Financial Management
Research Areas
Finance
First Page
1
Last Page
52
Identifier
10.2139/ssrn.3143752
Citation
HE, Ai; HUANG, Dashan; and ZHOU, Guofu.
New factors wanted: Evidence from a simple specification test. (2018). 1-52.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/6215
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/10.2139/ssrn.3143752