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Winners from Winners: A Tale of Risk Factors

Author

Listed:
  • Siddhartha Chib

    (Olin School of Business, Washington University in St. Louis, St. Louis, Missouri 63130)

  • Lingxiao Zhao

    (Peking University HSBC Business School, Shenzhen 518055, P. R. China)

  • Guofu Zhou

    (Olin School of Business, Washington University in St. Louis, St. Louis, Missouri 63130)

Abstract

Starting from twelve distinct factors from the recent literature, plus twelve principal components (PCs) of anomalies unexplained by the initial factors, a Bayesian comparison of approximately seventeen million models in terms of marginal likelihoods and posterior model probabilities shows that {Mkt, MOM, IA, ROE, MGMT, PERF, PEAD, FIN}, plus the nonconsecutive principal components, { PC 1 , PC 5 , PC 7 } are the best supported risk factors. Pricing tests and annualized out-of-sample Sharpe ratios for tangency portfolios suggest that this asset pricing model should be used for computing expected returns, assessing investment strategies and building portfolios.

Suggested Citation

  • Siddhartha Chib & Lingxiao Zhao & Guofu Zhou, 2024. "Winners from Winners: A Tale of Risk Factors," Management Science, INFORMS, vol. 70(1), pages 396-414, January.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:1:p:396-414
    DOI: 10.1287/mnsc.2023.4668
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