The alpha factor asset pricing model: A parable |
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| Affiliation: | 1. Nanotechnology Research Centre, Faculty of Science and Mathematics, Universiti Pendidikan Sultan Idris, 35900 Tanjung Malim, Perak, Malaysia;2. Department of Physics, Faculty of Science and Mathematics, Universiti Pendidikan Sultan Idris, 35900 Tanjung Malim, Perak, Malaysia;3. Department of Chemistry, Faculty of Science and Mathematics, Universiti Pendidikan Sultan Idris, 35900 Tanjung Malim, Perak, Malaysia;4. NANO-ElecTronic Centre, Faculty of Electrical Engineering, Universiti Teknologi MARA, 40450 Shah Alam, Selangor, Malaysia;5. Microelectronic and Nanotechnology – Shamsuddin Research Centre (MiNT-SRC), Faculty of Electrical and Electronic Engineering, Universiti Tun Hussein Onn Malaysia, 86400 Parit Raja, Batu Pahat, Johor, Malaysia;1. Korea National Cleaner Production Center, Korea Institute of Industrial Technology (KITECH), Hanshin intervalley24 East B/D 18F, 322 Teheran-ro, Gangnam-gu, Seoul 135-918, Republic of Korea;2. Research Center of Sustainable Strategy, YESSorg (Your Environment & Sustainability Service Organization) Co. Ltd., Dae-o B/D 307, 148-11, 636 Achasan-ro, Gwangjin-gu,, Seoul 143-802, Repubic of Korea;1. Australian National University, Australia;2. King’s College London, United Kingdom;3. University of Edinburgh, United Kingdom;1. Cass Business School, City University London, United Kingdom;2. CEPR, United Kingdom;3. Fuqua School of Business, Duke University, United States;4. NBER, United States;5. Bloomberg LP, United Kingdom |
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| Abstract: | Recent empirical studies use the returns of attribute-sorted portfolios of common stocks as if they represent risk factors in an asset pricing model. If the attributes are chosen following an empirically observed relation to the cross-section of stock returns, such portfolios will appear to be useful risk factors, even when the attributes are completely unrelated to risk. We illustrate this result using a parable and argue that the moral of the story is important in practice. |
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