NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

A Comparison of New Factor Models

Kewei Hou, Chen Xue, Lu Zhang

NBER Working Paper No. 20682
Issued in November 2014
NBER Program(s):   AP   CF   EFG   IFM

This paper compares the Hou, Xue, and Zhang (2014) q-factor model and the Fama and French (2014a) five-factor model on both conceptual and empirical grounds. It raises four concerns with the motivation of the five-factor model: The internal rate of return often correlates negatively with the one-period-ahead expected return; the value factor seems redundant in the data; the expected investment tends to correlate positively with the one-period-ahead expected return; and past investment is a poor proxy for the expected investment. Empirically, the four-factor q-model outperforms the five-factor model, especially in capturing price and earnings momentum.

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Document Object Identifier (DOI): 10.3386/w20682

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