NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Digesting Anomalies: An Investment Approach

Kewei Hou, Chen Xue, Lu Zhang

NBER Working Paper No. 18435
Issued in October 2012, Revised in November 2012
NBER Program(s):Asset Pricing, Corporate Finance, Economic Fluctuations and Growth

Motivated from investment-based asset pricing, we propose a new factor model consisting of the market factor, a size factor, an investment factor, and a return on equity factor. The new factor model outperforms the Carhart four-factor model in pricing portfolios formed on earnings surprise, idiosyncratic volatility, financial distress, net stock issues, composite issuance, as well as on investment and return on equity. The new model performs similarly as the Carhart model in pricing portfolios formed on size and momentum, abnormal corporate investment, as well as on size and book-to-market, but underperforms in pricing the total accrual deciles. The new model's performance, combined with its clear economic intuition, suggests that it can be used as a new workhorse model for academic research and investment management practice.

download in pdf format
   (553 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w18435

Published: Kewei Hou & Chen Xue & Lu Zhang, 2015. "Digesting Anomalies: An Investment Approach," Review of Financial Studies, vol 28(3), pages 650-705.

Users who downloaded this paper also downloaded* these:
Hou, Xue, and Zhang w20682 A Comparison of New Factor Models
Schwert w9277 Anomalies and Market Efficiency
Hou, Xue, and Zhang w23394 Replicating Anomalies
Stambaugh and Yuan w21533 Mispricing Factors
Harvey, Liu, and Zhu w20592 . . . and the Cross-Section of Expected Returns
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us