Working Paper: CEPR ID: DP17225
Authors: Elena Andreou; Patrick Gagliardini; Eric Ghysels; Mirco Rubin
Abstract: Hint: these are not the Fama-French 3 factors and they are not even spanned by the Fama-French 5 factors. More importantly, they feature superior out-of-sample pricing performance compared to standard asset pricing models. What is “common” about these factors? We identify the factor space common between individual stocks and sorted portfolios - neither affected by time-varying betas nor by the sorting characteristics.
Keywords: Testing; Common Factors; Portfolio Sorting; Factor Zoo
JEL Codes: C22; C38; C53; C55; G10; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| 3 common factors (3cf) (C10) | not spanned by Fama-French 3 or 5 factors (G19) |
| excess market returns (G12) | common factors (C38) |
| 3 common factors (3cf) (C10) | superior out-of-sample pricing performance (G19) |
| common factors (C38) | asset pricing performance (G19) |
| CAPM beta and size (C46) | 3 common factors (3cf) (C10) |