Abstract
After analyzing the relationship and risk type of factors, this paper proposes a new factor pricing model consisting of factor portfolios derived from the optimal distribution of risk and return. The new factor model outperforms the Sharp-Lintner (1964, 1965) CAPM, the Fama-French (1993) three-factor model, the Carhart (1997) four-factor model, the Hou-Xue-Zhang (2015) four-factor model and the Fama-French (2015, 2016) five-factor model in 16 of the 17 mimicking pricing portfolios. So far portfolios used for tests are limited and there are no studies investigating robustness of the models. To solve this problem, we propose using time-series simulation tests and anomaly portfolio reconstruction tests to conduct the robustness tests and GRS tests. The empirical results confirm our new factor models are more robust and has higher pricing power than others. The research of this paper is helpful to expand the modern financial pricing theory, and has a certain reference value for financial practice.
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