Which factor model? A systematic return covariation perspective

Shamim Ahmed; Ziwen Bu; Lazaros Symeonidis; Daniel Tsvetanov

doi:10.1016/j.jimonfin.2023.102865

Which factor model? A systematic return covariation perspective

Shamim Ahmed, Ziwen Bu, Lazaros Symeonidis, Daniel Tsvetanov

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Abstract

We examine which factor model best captures systematic return covariation by focusing on the economic implications for portfolio risk control. The pairwise variance equality test and the model confidence set procedure suggest that the Fama and French (2015) five-factor model, the Barillas and Shanken (2018) six-factor model, and the Fama and French (2018) six-factor model are the top performers for the factor model-implied minimum risk portfolios in the out-of-sample. When it comes to the minimum tracking error portfolios, the Barillas and Shanken (2018) six-factor model and the Fama and French (2018) six-factor model are the overall winners in the horse race.

Original language	English
Article number	102865
Journal	Journal of International Money and Finance
Volume	136
Early online date	3 May 2023
DOIs	https://doi.org/10.1016/j.jimonfin.2023.102865
Publication status	Published - Sept 2023

Keywords

Asset pricing model
Factor model
Model evaluation
Out-of-sample
Portfolio selection

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Which_Factor_Model_JIMFAccepted author manuscript, 573 KBLicence: CC BY-NC-ND

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abstract = "We examine which factor model best captures systematic return covariation by focusing on the economic implications for portfolio risk control. The pairwise variance equality test and the model confidence set procedure suggest that the Fama and French (2015) five-factor model, the Barillas and Shanken (2018) six-factor model, and the Fama and French (2018) six-factor model are the top performers for the factor model-implied minimum risk portfolios in the out-of-sample. When it comes to the minimum tracking error portfolios, the Barillas and Shanken (2018) six-factor model and the Fama and French (2018) six-factor model are the overall winners in the horse race.",

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AU - Bu, Ziwen

AU - Symeonidis, Lazaros

AU - Tsvetanov, Daniel

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AB - We examine which factor model best captures systematic return covariation by focusing on the economic implications for portfolio risk control. The pairwise variance equality test and the model confidence set procedure suggest that the Fama and French (2015) five-factor model, the Barillas and Shanken (2018) six-factor model, and the Fama and French (2018) six-factor model are the top performers for the factor model-implied minimum risk portfolios in the out-of-sample. When it comes to the minimum tracking error portfolios, the Barillas and Shanken (2018) six-factor model and the Fama and French (2018) six-factor model are the overall winners in the horse race.

KW - Asset pricing model

KW - Factor model

KW - Model evaluation

KW - Out-of-sample

KW - Portfolio selection

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U2 - 10.1016/j.jimonfin.2023.102865

DO - 10.1016/j.jimonfin.2023.102865

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VL - 136

JO - Journal of International Money and Finance

JF - Journal of International Money and Finance

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ER -

Which factor model? A systematic return covariation perspective

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Keywords

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