Ex-U.S. Equity Factor Model Horse Race

Which equity factor model is best among non-U.S. global stock markets? In other words, what market/accounting variables are most important to investors screening non-U.S. stocks? In his February 2020 paper entitled “A Comparison of Global Factor Models”, Matthias Hanauer compares eight widely used equity factor models on a common dataset spanning stocks from 47 non-U.S. developed and emerging markets based on gross Sharpe ratio. The models are:

1. The Capital Asset Pricing Model (CAPM) – market.
2. FF3 (3-factor) – market, size, book-to-market.
3. FF5 (5-factor) – adds profitability based on operating profits-to-book equity and investment to FF3.
4. FF6 (6-factor) – adds momentum to FF5.
5. FF6_CP (6-factor) – substitutes cash-based operating profits-to-assets for the profitability factor used in FF6.
6. HXZ4, or q-factor (4-factor) – market, size, profitability based on return-on-equity (ROE), investment.
7. SY4, or Mispricing (4-factor) – market, size, management, performance.
8. FF6_CP,m (6-factor) – substitutes a monthly value factor for the annual value factor in FF6_CP.

He employs annual accounting data because quarterly data are unavailable in many countries at the beginning of my sample period. Using factor input and return data for 56,171 stocks across developed and emerging markets during 1990 through 2018, he finds that: (more…)