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Practical Applications Summary
In Five Concerns with the Five-Factor Model, from the 2018 Quantitative Special Issue of the Journal of Portfolio Management, David Blitz, Matthias X. Hanauer, Milan Vidojevic, and Pim van Vliet (all of Robeco Asset Management) argue that Fama and French’s new five-factor asset pricing model is not a satisfactory improvement on the three-factor model, due to significant shortcomings that have not been sufficiently addressed. The authors list five concerns with the five-factor model: (1) the retainment of the CAPM relation between market beta and return as a starting point, (2) the absence of the momentum premium, (3) the robustness of the two new factors, (4) the economic rationale of the model, and (5) the inadequacy of the model to conclusively answer ongoing asset pricing discussions. The authors also briefly discuss the implicatio.s of(their findings and offer several questions for researchers to explore.
TOPIC: Factor-based models
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