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A Cap-Axis Integral Diagnostic of Factor Models

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  • Useong Shin

Abstract

I propose a cap-axis zero-alpha diagnostic for factor-model evaluation. Whole-stock capitalization prefixes are paired with equal realized exposure to the aggregate market, producing a bridge-alpha curve that localizes pricing errors within the market. Finite-grid HAC-Gaussian inference and residual-block calibration provide size-controlled functional tests. In 1967-2024 CRSP data, q5's negative daily bridge attenuates under lead-lag correction and is small monthly, whereas Fama-French and Carhart bridges become more visible monthly. Across 155 factors, cap-axis magnitude is neither a monotone transformation of maximum-Sharpe gain nor explained by exposure to FF3 SMB.

Suggested Citation

  • Useong Shin, 2026. "A Cap-Axis Integral Diagnostic of Factor Models," Papers 2607.01765, arXiv.org, revised Jul 2026.
    • Handle: RePEc:arx:papers:2607.01765
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    References listed on IDEAS

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    1. Serhiy Kozak & Stefan Nagel & Shrihari Santosh, 2018. "Interpreting Factor Models," Journal of Finance, American Finance Association, vol. 73(3), pages 1183-1223, June.
    2. Hansen, Lars Peter & Jagannathan, Ravi, 1997. "Assessing Specification Errors in Stochastic Discount Factor Models," Journal of Finance, American Finance Association, vol. 52(2), pages 557-590, June.
    3. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
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    Cited by:

    1. Useong Shin, 2026. "Overshooting the Coordinate: Where Factor Corrections Land on Characteristic Axes," Papers 2607.05091, arXiv.org, revised Jul 2026.

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