To better control for risk, we construct a novel machine learning based value factor and find that it outperforms existing value factors while earning less from risk and more from mispricings.

The result is a loophole, allowing the entire auto industry to sidestep some of the more painful efficiency requirements by inflating vehicle footprints. And historically, drivers almost always lean toward larger vehicles. “In general, if everything else about the vehicle is the same, consumers prefer the bigger one, with the roomier interior,” says Kate Whitefoot, a senior program officer at the National Academy of Engineering and the lead author of the paper (she was a doctoral student at the time of the study). Combine a regulatory loophole with a built-in, well-known customer choice, and the industry lurches towards the inevitable: larger models and more light trucks.