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Neoclassical Factors

  • Long Chen
  • Lu Zhang

Building on neoclassical reasoning, we propose a new multi-factor model that consists of the market factor and factor mimicking portfolios based on investment and productivity. The neo- classical three-factor model outperforms traditional factor models in explaining the average returns across testing portfolios formed on momentum, financial distress, investment, profitability, accruals, net stock issues, earnings surprises, and asset growth. Most intriguingly, winners have higher loadings than losers on both the low-minus-high investment factor and the high- minus-low productivity factor, which in turn help explain momentum profits.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13282.

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Date of creation: Jul 2007
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Handle: RePEc:nbr:nberwo:13282
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