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The investment manifesto

Listed author(s):
  • Lin, Xiaoji
  • Zhang, Lu

A deep-ingrained doctrine in asset pricing says that if an empirical characteristic-return relation is consistent with investor “rationality,” the relation must be “explained” by a risk (factor) model. The investment approach questions the doctrine. Factors formed on characteristics are not necessarily risk factors; characteristics-based factor models are linear approximations of firm-level investment returns. The evidence that characteristics dominate covariances in horse races does not necessarily mean mispricing; measurement errors in covariances are likely to blame. Most important, risks do not “determine” expected returns; the investment approach is no more and no less “causal” than the consumption approach in “explaining” anomalies.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304393213000020
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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 60 (2013)
Issue (Month): 3 ()
Pages: 351-366

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Handle: RePEc:eee:moneco:v:60:y:2013:i:3:p:351-366
DOI: 10.1016/j.jmoneco.2013.01.001
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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