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Investment and profitability versus value and momentum: The price of residual risk

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  • Li, Yuming

Abstract

Barillas and Shanken (2017) show that a traded factor is redundant if the intercept (alpha) in the regression of the factor on other factors is zero. I find that covariance-based asset pricing models imply that the alpha is proportional to the residual risk of the traded factor. Empirical estimation of the price of the residual risk suggests that the q-factor model of Hou et al. (2015) subsumes the roles of not only the value and momentum factors but also the investment and profitability factors of Fama and French (2015). However, the Fama–French (2015) model fails to subsume the roles of the momentum factor and the factors in the q-factor model. The momentum factor, along with the profitability factor in the Fama–French (2015) or Novy-Marx (2013) model does not subsume the role of the profitability factor in the q-factor model.

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  • Li, Yuming, 2018. "Investment and profitability versus value and momentum: The price of residual risk," Journal of Empirical Finance, Elsevier, vol. 46(C), pages 1-10.
    • Handle: RePEc:eee:empfin:v:46:y:2018:i:c:p:1-10
    DOI: 10.1016/j.jempfin.2017.12.001
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    1. Marie Brière & Ariane Szafarz, 2021. "When it rains, it pours: Multifactor asset management in good and bad times," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 44(3), pages 641-669, September.

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    More about this item

    Keywords

    Risk price; Traded factors; Anomalies;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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