Working Paper: NBER ID: w26538
Authors: Lu Zhang
Abstract: The q-factor model shows strong explanatory power and largely summarizes the cross section of average stock returns. In particular, the q-factor model fully subsumes the Fama-French (2018) 6-factor model in head-to-head factor spanning tests. The q-factor model is an empirical implementation of the investment CAPM. The basic philosophy is to price risky assets from the perspective of their suppliers (firms), as opposed to their buyers (investors). As a disruptive innovation, the investment CAPM has broad-ranging implications for academic finance and asset management practice.
Keywords: q-factor model; anomalies; EMH; behavioral finance; investment CAPM; consumption CAPM; CAPM; equilibrium theory
JEL Codes: E13; E22; E32; E44; G12; G14; G31; M41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high investment relative to low expected profitability (G31) | low costs of capital (G31) |
| low investment relative to high expected profitability (G31) | high costs of capital (G31) |
| profitability and expected investment costs (G31) | discount rate (E43) |
| investment CAPM (G12) | expected returns (G17) |
| firm characteristics (L20) | expected returns (G17) |
| investment CAPM (G12) | resolves anomalies in stock returns (G17) |