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Q‐FACTORS IN EMPIRICAL ASSET PRICING: A REVIEW AND SYNTHESIS
Author(s) -
Datta Smita,
Chakraborty Anindita
Publication year - 2019
Publication title -
journal of economic surveys
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.657
H-Index - 92
eISSN - 1467-6419
pISSN - 0950-0804
DOI - 10.1111/joes.12327
Subject(s) - capital asset pricing model , economics , consumption based capital asset pricing model , asset (computer security) , investment theory , profitability index , financial economics , portfolio , explanatory power , investment (military) , econometrics , arbitrage pricing theory , rational pricing , basis risk , empirical research , finance , computer science , philosophy , computer security , epistemology , politics , political science , law
The latest development in the asset pricing literature is the emergence of empirical asset pricing models comprising q‐factors (profitability and investment factors) in conjunction with other factors. However, as in the case of the older empirical models, there is scepticism regarding the application of these newer factor models consisting of q‐factors because of the debate surrounding the explanatory power of these empirically inspired asset pricing models. This review attempts to synthesize studies pertaining to the four alternative explanations of the asset pricing models comprising the q‐factors (profitability and investment) – the data snooping hypothesis, the risk‐based explanation, the irrational investor behaviour explanation and the interpretation that suggest that the combination of the risk‐free asset and the factors comprising the model span the mean‐variance efficient tangency portfolio that prices the universe of assets.