Stock-Market Risk Factors and Manager Performance

Abstract

There has been a proliferation of stock-market factors that have been mined from historical data, and researchers are now using different methods to address this factor zoo. The authors employ a new method of jointly testing stock-market factor models and manager performance using the attributes of market efficiency as an ideal, or benchmark. They find that a modified three-factor model with an intertemporal risk-free asset is the best factor model overall for traded stock portfolios. Evidence for a simple intertemporal CAPM is also encouraging. Consistent with prior research, they find little evidence of manager skill net of expenses.