The investment manifesto
A deep-ingrained doctrine in asset pricing says that if an empirical characteristic-return relation is consistent with investor “rationality,” the relation must be “explained” by a risk (factor) model. The investment approach questions the doctrine. Factors formed on characteristics are not necessarily risk factors; characteristics-based factor models are linear approximations of firm-level investment returns. The evidence that characteristics dominate covariances in horse races does not necessarily mean mispricing; measurement errors in covariances are likely to blame. Most important, risks do not “determine” expected returns; the investment approach is no more and no less “causal” than the consumption approach in “explaining” anomalies.
Year of publication: |
2013
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Authors: | Lin, Xiaoji ; Zhang, Lu |
Published in: |
Journal of Monetary Economics. - Elsevier, ISSN 0304-3932. - Vol. 60.2013, 3, p. 351-366
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Publisher: |
Elsevier |
Saved in:
Online Resource
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