Investing Research Articles

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

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

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

Is timing of U.S. equity factors broadly and reliably attractive? In their March 2023 paper entitled “Timing the Factor Zoo”, Andreas Neuhierl, Otto Randl, Christoph Reschenhofer and Josef Zechner analyze effectiveness of 39 timing signals applied to 318 known factors. Factors include such categories as intangibles, investment, momentum, profitability, trading frictions and value/growth. Timing signals… Keep Reading

How many, and which, factors should investors include when constructing multi-factor smart beta portfolios? In their August 2017 paper entitled “How Many Factors? Does Adding Momentum and Volatility Improve Performance”, Mohammed Elgammal, Fatma Ahmed, David McMillan and Ali Al-Amari examine whether adding momentum and low-volatility factors enhances the Fama-French 5-factor (market, size, book-to-market, profitability, investment) model of stock returns. They… Keep Reading

Does timing of factor premiums work? In his June 2016 paper entitled “My Factor Philippic”, Clifford Asness addresses three critiques of the exploitability of stock factor premiums: Most factors are currently very overvalued (expected premiums are small), perhaps because of crowded bets on them. Factor portfolios may therefore crash. In fact, increasing factor valuations account for most… Keep Reading

How should researchers address the issue of aggregate/cumulative data snooping bias, which derives from many researchers exploring approximately the same data over time? In the October 2014 version of their paper entitled “. . . and the Cross-Section of Expected Returns”, Campbell Harvey, Yan Liu and Heqing Zhu examine this issue with respect to studies… Keep Reading

Are widely used stock factor premiums amenable to timing based on the ratio of aggregate valuation of stocks in the long side to aggregate valuation of stocks in the short side of the factor portfolio (the value spread)? In their March 2017 paper entitled “Contrarian Factor Timing is Deceptively Difficult”, Clifford Asness, Swati Chandra, Antti Ilmanen and Ronen… Keep Reading

How attractive are purified factor portfolios, constructed to focus on one factor by avoiding exposures to other factors? In their January 2017 paper entitled “Pure Factor Portfolios and Multivariate Regression Analysis”, Roger Clarke, Harindra de Silva and Steven Thorley explore a multivariate regression approach to generating pure factor portfolios. They consider five widely studied factors: value (earnings yield);… Keep Reading

Does the information in short, intermediate and long stock price trends combined by relating multiple simple moving averages (SMA) to future returns usefully predict stock returns? In the September 2015 update of their paper entitled “A Trend Factor: Any Economic Gains from Using Information over Investment Horizons?”, Yufeng Han and Guofu Zhou examine a trend factor that simultaneously captures short, intermediate… Keep Reading