The alpha factor asset pricing model: A parable

Wayne E. Ferson; Sergei Sarkissian; Timothy Simin

doi:10.1016/S1386-4181(98)00005-6

The alpha factor asset pricing model: A parable

Wayne E. Ferson
, Sergei Sarkissian
, Timothy Simin

Finance

Research output: Contribution to journal › Article › peer-review

77 Scopus citations

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.

Original language	English (US)
Pages (from-to)	49-68
Number of pages	20
Journal	Journal of Financial Markets
Volume	2
Issue number	1
DOIs	https://doi.org/10.1016/S1386-4181(98)00005-6
State	Published - Feb 1999

All Science Journal Classification (ASJC) codes

Finance
Economics and Econometrics

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10.1016/S1386-4181(98)00005-6

Cite this

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title = "The alpha factor asset pricing model: A parable",

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.",

author = "Ferson, \{Wayne E.\} and Sergei Sarkissian and Timothy Simin",

note = "Funding Information: The seeds of this paper were sown some years ago by Robert Litzenberger. The paper has also benefited from comments by Jonathan Berk, Nai-fu Chen, Eugene Fama, Kenneth French, Ravi Jagannathan, Raymond Kan, Jaemin Kim, Owen Lamont, Bruce Lehmann, Ed Rice, Avanidhar Subrahmanyam, Sheridan Titman and Guofu Zhou. It was presented at the 1998 CIBER-UCLA Doctoral Consortium in Finance, at the Spring, 1998 Conference of the Institute for Quantitative Research in Finance and at the 1998 Western Finance Association Meetings. Ferson acknowledges support from the Pigott-Paccar professorship at the University of Washington and the National Bureau of Economic Research. ",

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doi = "10.1016/S1386-4181(98)00005-6",

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AU - Sarkissian, Sergei

AU - Simin, Timothy

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N2 - 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.

AB - 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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The alpha factor asset pricing model: A parable

Abstract

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