Investing Research Articles

Does the new Fama-French five-factor model of stock returns explain a wider range of anomalies than the workhorse Fama-French three-factor model. In the June 2015 update of their paper entitled “Dissecting Anomalies with a Five-Factor Model”, Eugene Fama and Kenneth French examine the power of their five-factor model of stock returns to explain five anomalies not explicitly related to the five factors… Keep Reading

Are the widely used Fama-French three-factor model (market, size, book-to-market ratio) and the Carhart four-factor model (adding momentum) the best factor models of stock returns? In their September 2014 paper entitled “Digesting Anomalies: An Investment Approach”, Kewei Hou, Chen Xue and Lu Zhang construct the q-factor model comprised of market, size, investment and profitability factors and test its ability to predict… Keep Reading

How many factors are optimal for modeling future returns of individual stocks? How do these factors relate to conventionally used factors (market, size, value, momentum, investment, profitability…)? In the June 2016 version of their paper entitled “Multifactor Models and the APT: Evidence from a Broad Cross-Section of Stock Returns”, Ilan Cooper, Paulo Maio and Dennis Philip derive… Keep Reading

Does adding profitability and asset growth (investment) factors improve the performance of the widely used Fama-French three-factor (market, size, book-to-market) model of stock returns? In the September 2014 version of their paper entitled “A Five-Factor Asset Pricing Model” Eugene Fama and Kenneth French assess whether extensions of their three-factor model to include profitability and investment… Keep Reading

Is the Fama-French five-factor (market, size, book-to-market, profitability, investment) model of stock returns optimal? In the September 2015 draft of their paper entitled “Choosing Factors”, Eugene Fama and Kenneth French investigate potential improvements to the overall predictive power of their five-factor model. Specifically, they examine: Using a profitability factor based on cash rather than operating profit, or substituting a… Keep Reading

Which factor models of stock returns are currently best? In their June 2018 paper entitled “q5“,  Kewei Hou, Haitao Mo, Chen Xue and Lu Zhang, introduce the q5 model of stock returns, which adds a fifth factor (expected growth) to the previously developed q-factor model (market, size, asset growth, return on equity). They measure expected growth as 1-year, 2-year and… Keep Reading

Under current U.S. accounting rules, many investments in innovation, human resources and brand that are crucial to long-term competitiveness immediately reduce operating profits and earnings (are expensed rather than capitalized). Does failure to incorporate such intangible investments in firm investment and valuation ratios (book-to-market, profitability and return on equity) harm equity investment decisions? In their… Keep Reading

Is the recent Fama-French augmentation of their classic three-factor (market, size, book-to-market) model of stock returns with profitability and investment factors a major advance? In their November 2016 paper entitled “Five Concerns with the Five-Factor Model”, David Blitz,  Matthias Hanauer, Milan Vidojevic and Pim van Vliet identify five concerns regarding the five-factor model. Based on empirical and theoretical (rationale)… Keep Reading

Do linear factor model specification choices inherently produce out-of-sample underperformance of investment strategies seeking to exploit factor premiums? In their January 2024 paper entitled “Why Has Factor Investing Failed?: The Role of Specification Errors”, Marcos Lopez de Prado and Vincent Zoonekynd examine whether standard practices induce factor specification errors and how such errors might explain… Keep Reading

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…. Keep Reading