A factor model that I can believe in
Ernie Chan (noreply@blogger.com)
Some of you may remember that I preached about the uselessness of factor models in predicting short term return, and the unreliability of many exotic factors even for the long term. In particular, factor models are especially inaccurate in valuing growth stocks (i.e. stocks with low book-to-market ratio), as evidenced by such models' poor performance during the internet bubble. This is not surprising because most commonly used factors rely on historical sales or earnings measures to judge compa