A Long-Run Productivity Risks Driving q-Factor Model

Abstract

I incorporate the productivity growth with regime-switching in the conditional mean and volatility into an investment-based q-factor asset pricing model. The long-run productivity risks factors largely summarize the cross-sectional stock return, where the time-varying volatility plays an important role. A parsimonious q-factor model driven by productivity risks explains about 90% variation of return of 25 Size/BM portfolios and 75% variation of return of 160 portfolios, which is comparable to the Fama-French multifactor models, the Carhart (1997) four-factor model, and the Hou, Mo, Xue & Zhang (2020) augmented q-factor model. Therefore, productivity growth can be the potential force driving investment-based models.

Zhiting Wu
Zhiting Wu
PhD Candidate in Economics and Finance

My research interests include Asset Pricing, Macro-Finance, and Macroeconomics.