Integrating Factor Models

Doron Avramov*, Si Cheng, Lior Metzker, Stefan Voigt

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

This paper develops a comprehensive framework to address uncertainty about the correct factor model. Asset pricing inferences draw on a composite model that integrates over competing factor models weighted by posterior probabilities. Evidence shows that unconditional models record near-zero probabilities, while postearnings announcement drift, quality-minus-junk, and intermediary capital are potent factors in conditional asset pricing. Out-of-sample, the integrated model performs well, tilting away from subsequently underperforming factors. Model uncertainty makes equities appear considerably riskier, while model disagreement about expected returns spikes during crash episodes. Disagreement spans all return components involving mispricing, factor loadings, and risk premia.

Original languageAmerican English
Pages (from-to)1593-1646
Number of pages54
JournalJournal of Finance
Volume78
Issue number3
DOIs
StatePublished - Jun 2023

Bibliographical note

Publisher Copyright:
© 2023 The Authors. The Journal of Finance published by Wiley Periodicals LLC on behalf of American Finance Association.

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