A Comparison of New Factor Models

K. Hou, C. Xue, and L. Zhang, SSRN WP 2015

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Comments
1. The paper is interesting in that I have never seen a work that directly
challenges another published paper (Fama and French).
2. The paper by HXZ seems to have a firmer theoretical basis than that
of Fama and French as it is based on firm optimization rather than
present value relations.
3. Moreover, the fact that most behavioral (and hence momentum) anomalies are resolved with the q-factor model is quite motivating.
4. However, the paper does not test the anomalies resulting from investor preferences/demand-side such as skewness and coskewness. In
this sense it does not provide a full general equilibrium picture of the
financial market.
5. In addition to the RFS paper that has already been published, the text
serves as a good supplement that summarizes the past anomalies well
and one that proposes methods to estimate internal rates of return
(IRR).
6. It is interesting to note that two marginally significant anomalies
are Ang, Hodrick, Xing, and Zhangs idiosyncratic volatility puzzle
and Amihuds illiquidity measures. However the IVOL and Liquidity
anomalies were rejected by an another working paper by Harvey, Liu,
and Zhu (2015). I wonder from where such dierence arises.

Research Ideas
1. Focus on investor/demand-side motivated factors such as skewsness
and coskewness. I would be surprised if these anomalies can be explained by the q-factor model because the model is supply-side in
nature.
2. Attempt to construct a general equilibrium model that also accounts
for heterogeneity in investor preferences. This may further strenghten
the theoretical/ empirical explanatory power of the model.