Digesting Anomalies: An Investment Approach

• DOI: 10.1093/rfs/hhu068
• Publication Date: 2015-02-16T08:32:59Z
• Authors: Kewei Hou; Chen Xue; Lu Zhang
• Keywords: jel:G14; 0502 economics and business; 05 social sciences; jel:G12

An empirical q-factor model consisting of the market factor, a size factor, an investment factor, and a profitability factor largely summarizes the cross section of average stock returns. A comprehensive examination of nearly 80 anomalies reveals that about one-half of the anomalies are insignificant in the broad cross section. More importantly, with a few exceptions, the q-factor model's performance is at least comparable to, and in many cases better than that of the Fama-French (1993) 3-factor model and the Carhart (1997) 4-factor model in capturing the remaining significant anomalies.