Fast-and-frugal asset pricing
Abstract
Asset pricing is the jewel in the crown of standard finance theory. To succeed at all a credible fast-and-frugal model of asset pricing must emerge to effectively challenge that of standard theory. We begin by pointing out the proliferation of a “factor zoo” of alleged asset–pricing “risk-factors” has started to make a mockery of any coherent asset–pricing model at all. The low power and poor statistical replicability of asset–price model tests is discussed. Specifically we focus on how the Fama-French's 3/5 factor asset–pricing model has enhanced its ability to explain/predict the cross-sectional distribution of equity returns. A more frugal version of the Fama-French 5-factor model is advanced ...
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