Integrating Factor Models
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Integrating Factor Models. / Voigt, Stefan; Avramov, Doron; Metzker, Lior; Cheng, Si.
In: The Journal of Finance, Vol. 78, No. 3, 2023, p. 1593-1646.Research output: Contribution to journal › Journal article › Research › peer-review
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TY - JOUR
T1 - Integrating Factor Models
AU - Voigt, Stefan
AU - Avramov, Doron
AU - Metzker, Lior
AU - Cheng, Si
PY - 2023
Y1 - 2023
N2 - This paper develops a comprehensive framework to address uncertainty about the correct factor model. Asset pricing inferences draw on a composite model that integrates over competing factor models weighted by posterior probabilities. Evidence shows that unconditional models record near-zero probabilities, while post-earnings announcement drift, quality-minus-junk, and intermediary capital are potent factors in conditional asset pricing. The integrated model tilts away from the subsequently underperforming factors, and delivers robust strategies. Model uncertainty makes equities appear considerably riskier, while model disagreement about expected returns spikes during crash episodes. Disagreement spans all return components involving mispricing, factor loadings, and risk premia.
AB - This paper develops a comprehensive framework to address uncertainty about the correct factor model. Asset pricing inferences draw on a composite model that integrates over competing factor models weighted by posterior probabilities. Evidence shows that unconditional models record near-zero probabilities, while post-earnings announcement drift, quality-minus-junk, and intermediary capital are potent factors in conditional asset pricing. The integrated model tilts away from the subsequently underperforming factors, and delivers robust strategies. Model uncertainty makes equities appear considerably riskier, while model disagreement about expected returns spikes during crash episodes. Disagreement spans all return components involving mispricing, factor loadings, and risk premia.
U2 - 10.1111/jofi.13226
DO - 10.1111/jofi.13226
M3 - Journal article
VL - 78
SP - 1593
EP - 1646
JO - The Journal of Finance
JF - The Journal of Finance
SN - 0022-1082
IS - 3
ER -
ID: 318816240