We have just released the latest qfactors data library that has been updated through December 2020. The table below shows that the HouXueZhang (2015) qfactor model continues to fully subsume the FamaFrench (2018) 6factor model in the extended sample from January 1967 to December 2020. The FamaFrench 6factor model cannot explain the qfactors. The investment premium is 0.33% per month (t = 4.1), with a 6factor alpha of 0.09% (t = 2.55). The return on equity (Roe) premium is 0.51% (t = 4.96), with a 6factor alpha of 0.25% (t = 4.09). The GibbonsRossShanken (1989, GRS) test strongly rejects the 6factor model with the null hypothesis that the 6factor alphas of the investment and Roe premiums are jointly zero (p = 0.00). More important, the HouXueZhang qfactor model fully subsumes the FamaFrench factors. The HML, CMA, and RMW premiums are on average 0.24%, 0.27%, and 0.27% per month (t = 1.76, 3.05, and 2.77), but their qfactor alphas are virtually zero, 0.01%, 0.01%, and 0.02% (t = 0.09, 0.39, and 0.3), respectively. UMD is on average 0.62% (t = 3.63), but its qfactor alpha is only 0.18% (t = 0.86). The GRS test fails to reject the qfactor model with the null that the qfactor alphas of HML, CMA, RMW, and UMD are jointly zero (p = 0.7). So, is asset pricing scientific? Popper's (1959) demarcation between science and nonscience hinges on falsifiability. Lakatos (1970) says that a scientific research program should be "progressive" in that it needs to explain empirical puzzles with few ad hoc fixes. Despite his early "mob psychology" regarding theory choice in Structure (1962), Kuhn (1977) later characterizes a good theory in terms of its accuracy, consistency, scope, simplicity, and fruitfulness. Finally, Feyerabend (1975) argues that science is an anarchic enterprise with no particular epistemic order. While conscientious about external forces at work, we are determined to show Feyerabend is wrong about asset pricing. References Feyerabend, Paul, 1975, Against Method, New Left Books. Kuhn, Thomas S., 1962, The Structure of Scientific Revolutions, University of Chicago Press. Kuhn, Thomas S., 1977, Objectivity, value judgment, and theory choice, in T. S. Kuhn, The Essential Tension, University of Chicago Press. Lakatos, Imre, 1970, Falsification and the methodology of scientific research programmes, in Criticism and the Growth of Knowledge, I. Lakatos and A. Musgrave (eds.), Cambridge University Press. Popper, Karl, 1959, The Logic of Scientific Discovery, Hutchinson & Co.
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Lu Zhang
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August 2022
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