Investing Research Articles

The body of U.S. stock market research offers hundreds of factors (the factor zoo) to explain and predict return differences across stocks. Is there a reduced set of factors that most accurately and consistently captures fundamental equity risks? In their March 2018 paper entitled “Searching the Factor Zoo”, Soosung Hwang and Alexandre Rubesam employ Bayesian inference to test all… Keep Reading

Which equity factors truly explain stock returns, and what group of them constitute the best model? In their November 2019 paper entitled “Bayesian Solutions for the Factor Zoo: We Just Ran Two Quadrillion Models”, Svetlana Bryzgalova, Jiantao Huang and Christian Julliard present a Bayesian estimation and model selection method for pricing of stock portfolios that… Keep Reading

As described in “Quantifying Snooping Bias in Published Anomalies”, anomalies published in leading journals offer substantial opportunities for exploitation on a gross basis. What profits are left after accounting for portfolio maintenance costs? In their November 2017 paper entitled “Accounting for the Anomaly Zoo: A Trading Cost Perspective”, Andrew Chen and Mihail Velikov examine the combined… 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

From a purely statistical perspective, how many factors are optimal for explaining both time series and cross-sectional variations in stock anomaly/stock returns, and how do these statistical factors relate to stock/firm characteristics? In their July 2018 paper entitled “Factors That Fit the Time Series and Cross-Section of Stock Returns”, Martin Lettau and Markus Pelger search for the… 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

Does suppressing unrelated risks from stock factor portfolios improve performance? In their January 2017 paper entitled “Diversify and Purify Factor Premiums in Equity Markets”, Raul Leote de Carvalho, Lu Xiao, François Soupé and Patrick Dugnolle investigate how to improve the capture of four types of stock factor premiums: value (12 measures); quality (16 measures); low-risk (two measures); and, momentum (10 measures). They… Keep Reading

Has (hypothetical) equity factor investing worked as well in recent years as indicated in past studies? In his July 2015 paper entitled “Factor Investing Revisited”, David Blitz updates his prior study quantifying the performance of allocations to U.S. stocks based on three factor premiums: (1) value (high book-to-market ratio); (2) momentum (high return from 12 months… Keep Reading

Is it possible to test factor models of stock returns directly on individual stocks rather than on portfolios of stocks sorted per preconceived notions of factor importance. In their November 2015 paper entitled “Tests of Alternative Asset Pricing Models Using Individual Security Returns and a New Multivariate F-Test”, Shafiqur Rahman, Matthew Schneider and Gary Antonacci apply a statistical… Keep Reading