Journal of Financial Economics Vol. 128 No. 2 2018
Choosing factors
Abstract
Our goal is to develop insights about the maximum squared Sharpe ratio for model factors as a metric for ranking asset pricing models. We consider nested and non-nested models. The nested models are the capital asset pricing model, the three-factor model of Fama and French (1993), the five-factor extension in Fama and French (2015), and a six-factor model that adds a momentum factor. The non-nested models examine three issues about factor choice in the six-factor model: (1) cash profitability versus operating profitability as the variable used to construct profitability factors, (2) long-short spread factors versus excess return factors, and (3) factors that use small or big stocks versus factors that use both.
- DOI
- 10.1016/j.jfineco.2018.02.012
- Volume
- 128
- Issue
- 2
- Pages
- 234-252
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref