Integrating Factor Models

Doron Avramov

doi:10.1111/jofi.13226

Integrating Factor Models

2023-04-04

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DOI：10.1111/jofi.13226

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This paper develops a comprehensive framework to address uncertainty about the correct factor model. Asset pricing inferences draw on a composite model that integrates over competing factor models weighted by posterior probabilities. Evidence shows that unconditional models record near-zero probabilities, while postearnings announcement drift, quality-minus-junk, and intermediary capital are potent factors in conditional asset pricing. Out-of-sample, the integrated model performs well, tilting away from subsequently underperforming factors. Model uncertainty makes equities appear considerably riskier, while model disagreement about expected returns spikes during crash episodes. Disagreement spans all return components involving mispricing, factor loadings, and risk premia.

Keyword:

STOCK RETURN PREDICTABILITY

ASSET PRICING-MODELS

CROSS-SECTION

PRESIDENTIAL-ADDRESS

INFORMATION

PERFORMANCE

RISK

Integrating Factor Models

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