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The investment manifesto

Author

Listed:
  • Lin, Xiaoji
  • Zhang, Lu
Abstract
A deep-ingrained doctrine in asset pricing says that if an empirical characteristic-return relation is consistent with investor “rationality,” the relation must be “explained” by a risk (factor) model. The investment approach questions the doctrine. Factors formed on characteristics are not necessarily risk factors; characteristics-based factor models are linear approximations of firm-level investment returns. The evidence that characteristics dominate covariances in horse races does not necessarily mean mispricing; measurement errors in covariances are likely to blame. Most important, risks do not “determine” expected returns; the investment approach is no more and no less “causal” than the consumption approach in “explaining” anomalies.

Suggested Citation

  • Lin, Xiaoji & Zhang, Lu, 2013. "The investment manifesto," Journal of Monetary Economics, Elsevier, vol. 60(3), pages 351-366.
    • Handle: RePEc:eee:moneco:v:60:y:2013:i:3:p:351-366
    DOI: 10.1016/j.jmoneco.2013.01.001
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    References listed on IDEAS

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