Model scan of factors in U.K. stock returns

We use the Bayesian model scan approach of Chib, S., X. Zeng, and L. Zhao. 2020. ‘On Comparing Asset Pricing Models.’ The Journal of Finance 75 (1): 551–577. https://doi.org/10.1111/jofi.12854, and Chib, S., L. Zhao, and G. Zhou. 2023. ‘Winners from Winners: A Tale of Risk Factors.’ Management Science to examine which are the best performing models in a set of 12 candidate factors in U.K. stock returns. We find that a five-factor model has the highest posterior probability across the whole sample period but the posterior probability is low. The best factor model outperforms traditional factor models using a number of metrics. However the best model performs poorly in pricing a set of anomaly portfolios.