Working Paper: NBER ID: w13282
Abstract: Building on neoclassical reasoning, we propose a new multi-factor model that consists of the market factor and factor mimicking portfolios based on investment and productivity. The neo- classical three-factor model outperforms traditional factor models in explaining the average returns across testing portfolios formed on momentum, financial distress, investment, profitability, accruals, net stock issues, earnings surprises, and asset growth. Most intriguingly, winners have higher loadings than losers on both the low-minus-high investment factor and the high- minus-low productivity factor, which in turn help explain momentum profits.
Keywords: No keywords provided
JEL Codes: G11; G12; G14; G24; G31; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| neoclassical factors (F11) | average stock returns (G17) |
| market factor (P23) | expected excess return on a portfolio (G11) |
| investment factor (G31) | expected excess return on a portfolio (G11) |
| productivity factor (E23) | expected excess return on a portfolio (G11) |
| higher investment-to-assets ratios (G32) | lower expected returns (G12) |
| higher valuations (G19) | lower investment levels (G31) |
| financial distress (G33) | lower average returns (G19) |
| lower profitability and productivity loadings (D24) | lower average returns (G19) |
| higher expected profitability (L21) | higher expected returns (G12) |
| higher investment levels (E22) | lower expected returns (G19) |