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Comparing competing factor and characteristics models: Evidence in Japan

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  • Chou, Pin-Huang
  • Ko, Kuan-Cheng
  • Rhee, S. Ghon

Abstract

The main purpose of this study is to simultaneously compare the explanatory abilities of various firm characteristics and factor models in the Japanese stock market. We show that the factor models developed by Fama and French (1993, 2015, 2018), Carhart (1997), and Hou et al. (2015) all fail to be priced in Japan. In addition, value and operating profitability anomalies are prevalent in Japan, while size, investment, and momentum effects are not. Our findings are in line with what is indicated in the existing literature: the characteristics model associated with value and operating profitability better describes the cross-sectional variations of stock returns than factor models in Japan.

Suggested Citation

  • Chou, Pin-Huang & Ko, Kuan-Cheng & Rhee, S. Ghon, 2023. "Comparing competing factor and characteristics models: Evidence in Japan," Pacific-Basin Finance Journal, Elsevier, vol. 82(C).
    • Handle: RePEc:eee:pacfin:v:82:y:2023:i:c:s0927538x23002500
    DOI: 10.1016/j.pacfin.2023.102179
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    Keywords

    Asset pricing models; Asset pricing anomalies; Errors-in-variables bias; Instrumental variables; Japanese market;
    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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