An Examination of Alternative Factor Models in UK Stock Returns

This paper examines the mean-variance efficiency of a number of factor models in UK stock returns. The paper also explores, using the approach of MacKinlay (1995), whether missing risk factors or nonrisk-based explanations best explain the pricing errors of the different factor models. The evidence in the paper suggests that the mean-variance efficiency of each factor model is rejected and missing risk factors are unable to explain the pricing errors of any of the models. Some nonrisk-based explanations, which posit a wide spread in abnormal returns, may be a more plausible source of explaining the pricing errors of the factor models. © 2001 Kluwer Academic Publishers.