An examination of linear factor models in UK stock returns in the presence of dynamic trading

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Abstract

This study uses the approach of Ferson and Siegel, Rev Financ Stud 22:2735–2758 (2009), and Ferson, Siegel and Wang, J Financ Quant Anal, forthcoming, (2024) to examine the unconditional mean–variance efficiency, in the presence of conditioning information (UMV), of ten linear factor models in U.K. stock returns. The study finds that the UMV efficiency of all the multifactor models is strongly rejected in U.K. stock returns in two different sets of test assets. This rejection is mainly driven by allowing dynamic trading in the test assets and factors. The optimal use of conditioning information also has a significant impact in relative model comparison tests. In relative model comparison tests based on UMV efficiency, the best performing model is the eight-factor model of Chib and Zeng, J Bus Econ Stat 38:771–783 (2020) model.

Original languageEnglish
Pages (from-to)1121-1147
Number of pages27
JournalReview of Quantitative Finance and Accounting
Volume63
Issue number3
Early online date15 May 2024
DOIs
Publication statusPublished - 1 Oct 2024

Keywords

  • multi-factor models
  • asset pricing
  • conditioning information
  • dynamic trading

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