tag:blogger.com,1999:blog-7905515.post1805467002580925447..comments2024-03-14T11:09:32.759-05:00Comments on Falkenblog: The Latest Equity Factor ModelEric Falkensteinhttp://www.blogger.com/profile/07243687157322033496noreply@blogger.comBlogger6125tag:blogger.com,1999:blog-7905515.post-83705369275204631332009-09-26T09:46:42.882-05:002009-09-26T09:46:42.882-05:00"The first is Investments-to-Assets. This is ..."The first is Investments-to-Assets. This is the change in Property, Plant and Equipment plus the change in inventories over assets. Firms with high I/A ratios have higher returns than those with low I/A ratios." <br /><br />While I haven't read the paper, this seems to be a little tautological or guilty of data snooping. If you're taking asset growth over a certain period, you're going to compare it to beginning, ending, or average assets. The last two comparisons seem largely meaningless and first one means that you know what the firm's growth will be ex ante. But who knows that? <br />Indeed, who cares about asset growth if you don't have returns that exceed such growth? It seems like you'd want to know the incremental return on incremental investment. And lo and behold, firms with higher ROAs outperform!<br />For the next test will show that it's bright out when the sun is shining.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7905515.post-70410107697759096932009-09-24T15:55:33.958-05:002009-09-24T15:55:33.958-05:00"Firms with high I/A ratios have higher retur..."Firms with high I/A ratios have higher returns than those with low I/A ratios."<br /><br />I think that's a typo. I think that they construct the I/A factor as low minus high. Controlling for cash flow, low investment must mean high cost of capital, and that must mean higher expected return. This doesn't detract from your general argument though.Pat Larkinhttps://www.blogger.com/profile/13109246094505959468noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-66811409606557517932009-09-24T08:22:19.703-05:002009-09-24T08:22:19.703-05:00Factor models are nice playthings but there is no ...Factor models are nice playthings but there is no there there.<br /><br />The Fama French model is a well intentioned attempt to reassert that expected return is a function of expected risk. It tries to propose a framework that does not suffer from the flaws of the single factor market model.<br /><br />Once one gives up on finding a single factor model that "works" then one is free to find any number of factors that one wants to play around with. There is no a priori reason that the right number of factors is three, nor is there any empirical support for three factors. The number of factors could be zero, 22, pi cubed divided by 5, etc...<br /><br />Fama and French are marketers. They aren't scientists. Or if they are scientists they are more like Fleischmann and Pons, the gold fusion guys. If Fama and French are marketers then it is not too much of a stretch to suggest that Zhang and Chen are marketers. Obviously they would like to score a DFA=like gig<br /><br />The Zhang-Chen paper is not "a new insight". It is a paper that conforms to the research protocol of the Journal of Finance (see upcoming papers on the JOF website). It says nothing new that others haven't previously written about.<br /><br />This is more like asking whether you should start a joke with " A priest, a rabbi and an eskimo go into a bar..." or "An accountant, a portfolio manager and a stripper go into a bar...".Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7905515.post-12551408779492430052009-09-24T08:01:01.859-05:002009-09-24T08:01:01.859-05:00Eric
I'm a new arrival to your blog, and have...Eric<br /><br />I'm a new arrival to your blog, and have found it very entertaining and informative (I look forward to reading your new book).<br /><br />Apropos your post, I think, to be fair to Fama-French, their papers have examined the explanatory power of their 3-factor model on stocks sorted not just by book-market and size, but also by EPS, sales growth, leverage, and other financial ratios.<br /><br />So, I don't think it's quite right to assert that "Fama and French created this model to explain, well, itself". I doubt the FF model would be as ubiquitous if this were true!<br /><br />I look forward to reading Chen and Zhang's paper.<br /><br />AlanUnknownhttps://www.blogger.com/profile/01904159390588362848noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-32109485547561874512009-09-24T05:45:48.805-05:002009-09-24T05:45:48.805-05:00my bad: firms that buy back outperform. typo.my bad: firms that buy back outperform. typo.Eric Falkensteinhttps://www.blogger.com/profile/07243687157322033496noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-88211845347957173742009-09-24T01:08:42.554-05:002009-09-24T01:08:42.554-05:00"issuers of capital--debt or equity--tend to ..."issuers of capital--debt or equity--tend to underperform, while those who buy it back tend to underperform"<br />So we buy those that do neither? ;-)Anonymousnoreply@blogger.com