Journal
JOURNAL OF FINANCIAL ECONOMICS
Volume 128, Issue 2, Pages 234-252Publisher
ELSEVIER SCIENCE SA
DOI: 10.1016/j.jfineco.2018.02.012
Keywords
Asset pricing tests; Factor model; Sharpe ratio; Max squared Sharpe ratio
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Our goal is to develop insights about the maximum squared Sharpe ratio for model factors as a metric for ranking asset pricing models. We consider nested and non-nested models. The nested models are the capital asset pricing model, the three-factor model of Fama and French (1993), the five-factor extension in Fama and French (2015), and a six-factor model that adds a momentum factor. The non-nested models examine three issues about factor choice in the six-factor model: (1) cash profitability versus operating profitability as the variable used to construct profitability factors, (2) long-short spread factors versus excess return factors, and (3) factors that use small or big stocks versus factors that use both. (C) 2018 Elsevier B.V. All rights reserved.
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