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Is that factor just lucky? Australian evidence

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  • Hoang, Khoa
  • Cannavan, Damien
  • Gaunt, Clive
  • Huang, Ronghong

Abstract

Conventional test statistics do not account for data mining, leading to the identification of asset pricing factors that are the product of luck rather than being true risk factors. We construct a unique set of ninety-one risk factors for the period from January 1992 to December 2017 and test which factors contribute in an economically and statistically significant manner towards improving the cross-sectional performance of asset pricing models. Our results show that the market factor is the only factor in the Australian market that consistently survives the stringent approach to factor selection that takes into account the data-mining issue. Our results hold across individual stocks and portfolios and are robust to block bootstrapping and exclusion of small stocks.

Suggested Citation

  • Hoang, Khoa & Cannavan, Damien & Gaunt, Clive & Huang, Ronghong, 2019. "Is that factor just lucky? Australian evidence," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    • Handle: RePEc:eee:pacfin:v:57:y:2019:i:c:s0927538x1930304x
    DOI: 10.1016/j.pacfin.2019.101191
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    Cited by:

    1. Philip Gray & Angel Zhong, 2022. "Assessing the usefulness of daily and monthly asset‐pricing factors for Australian equities," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(1), pages 181-211, March.

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    More about this item

    Keywords

    Multiple hypothesis testing; Factor models; Data-mining; Bootstrap;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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