Details
| Original language | English |
|---|---|
| Article number | 2350011 |
| Journal | The Quarterly Journal of Finance |
| Volume | 13 |
| Issue number | 4 |
| Publication status | Published - 8 Nov 2023 |
Abstract
We comprehensively investigate the robustness of well-known factor models to altered factor formation breakpoints. Deviating from the standard 30th and 70th percentile selection, we use an extensive set of anomaly test portfolios to uncover two main findings: First, there is a trade-off between specification and diversification. More centered breakpoints tend to result in less (idiosyncratic) risk. More extreme sorts lead to greater exposure to the underlying anomalies and thus to higher average returns. Second, the models are robust to varying degrees. Hou et al.'s model [2015, Digesting Anomalies: An Investment Approach, Review of Financial Studies 28, 650-705] is much more sensitive to changes in breakpoints than the Fama-French models.
Keywords
- Empirical asset pricing, breakpoints, factor models, replication analysis, robustness
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)
- Economics and Econometrics
- Economics, Econometrics and Finance(all)
- Finance
- Business, Management and Accounting(all)
- Strategy and Management
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In: The Quarterly Journal of Finance, Vol. 13, No. 4, 2350011, 08.11.2023.
Research output: Contribution to journal › Article › Research › peer review
}
TY - JOUR
T1 - How Robust are Empirical Factor Models to the Choice of Breakpoints?
AU - Hollstein, Fabian
AU - Prokopczuk, Marcel
AU - Voigts, Victoria
N1 - Publisher Copyright: © 2023 World Scientific Publishing Company.
PY - 2023/11/8
Y1 - 2023/11/8
N2 - We comprehensively investigate the robustness of well-known factor models to altered factor formation breakpoints. Deviating from the standard 30th and 70th percentile selection, we use an extensive set of anomaly test portfolios to uncover two main findings: First, there is a trade-off between specification and diversification. More centered breakpoints tend to result in less (idiosyncratic) risk. More extreme sorts lead to greater exposure to the underlying anomalies and thus to higher average returns. Second, the models are robust to varying degrees. Hou et al.'s model [2015, Digesting Anomalies: An Investment Approach, Review of Financial Studies 28, 650-705] is much more sensitive to changes in breakpoints than the Fama-French models.
AB - We comprehensively investigate the robustness of well-known factor models to altered factor formation breakpoints. Deviating from the standard 30th and 70th percentile selection, we use an extensive set of anomaly test portfolios to uncover two main findings: First, there is a trade-off between specification and diversification. More centered breakpoints tend to result in less (idiosyncratic) risk. More extreme sorts lead to greater exposure to the underlying anomalies and thus to higher average returns. Second, the models are robust to varying degrees. Hou et al.'s model [2015, Digesting Anomalies: An Investment Approach, Review of Financial Studies 28, 650-705] is much more sensitive to changes in breakpoints than the Fama-French models.
KW - Empirical asset pricing
KW - breakpoints
KW - factor models
KW - replication analysis
KW - robustness
UR - http://www.scopus.com/inward/record.url?scp=85176598034&partnerID=8YFLogxK
U2 - 10.2139/ssrn.3924821
DO - 10.2139/ssrn.3924821
M3 - Article
VL - 13
JO - The Quarterly Journal of Finance
JF - The Quarterly Journal of Finance
SN - 2010-1392
IS - 4
M1 - 2350011
ER -