Which Portfolios? The Construction Dependence of Factor Model Performance

2026/06/17 by Useong Shin · 1 voice · 1 citation
Economics, Econometrics and Finance · #q-fin.GN #q-fin.PR

paper · pdf

Abstract

Factor-model performance depends not only on the model but also on how test assets are constructed. We form characteristic-unsorted random portfolios from a broad CRSP universe and vary stock selection, initial weighting, holding, and rebalancing. Rankings shift materially: buy-and-hold favors FF5 and FF6, whereas daily constant-weighting favors FF3, the most stable model across designs. Although q5 attains the highest maximum Sharpe ratio in factor-spanning tests, it leaves comparatively large and construction-sensitive pricing errors on random portfolios. These results reflect construction-specific weighting of each model's pricing-error vector. Test-asset construction, including dynamic weight management, is therefore a design choice in model evaluation.

Cited by

• A Cap-Axis Integral Diagnostic of Factor Models
• Anatomy of the Market: A Body-Tail Test of Factor Models

Discussions

• Useong Shin: Which Portfolios? The Construction Dependence of Factor Model Performance https://arxiv.org/abs/2606.19550 https://arxiv.org/pdf/2606.19550 https://arxiv.org/html/2606.19550 [bsky, 0 points, 0 comments]

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