Abstract
We use the Bayesian model scan approach of Chib, S., X. Zeng, and L. Zhao. 2020. ‘On Comparing Asset Pricing Models.’ The Journal of Finance 75 (1): 551–577. https://doi.org/10.1111/jofi.12854, and Chib, S., L. Zhao, and G. Zhou. 2023. ‘Winners from Winners: A Tale of Risk Factors.’ Management Science to examine which are the best performing models in a set of 12 candidate factors in U.K. stock returns. We find that a five-factor model has the highest posterior probability across the whole sample period but the posterior probability is low. The best factor model outperforms traditional factor models using a number of metrics. However the best model performs poorly in pricing a set of anomaly portfolios.
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