Mispricing Factors
A four-factor model with two "mispricing" factors, in addition to market and size factors, accommodates a large set of anomalies better than notable four- and five-factor alternative models. Moreover, our size factor reveals a small-firm premium nearly twice usual estimates. The mispricing...
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| Published in: | The Review of financial studies Vol. 30; no. 4; pp. 1270 - 1315 |
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| Main Authors: | , |
| Format: | Journal Article |
| Language: | English |
| Published: |
Oxford University Press for The Society for Financial Studies
01-04-2017
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| Online Access: | Get full text |
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| Summary: | A four-factor model with two "mispricing" factors, in addition to market and size factors, accommodates a large set of anomalies better than notable four- and five-factor alternative models. Moreover, our size factor reveals a small-firm premium nearly twice usual estimates. The mispricing factors aggregate information across 11 prominent anomalies by averaging rankings within two clusters exhibiting the greatest return co-movement. Investor sentiment predicts the mispricing factors, especially their short legs, consistent with a mispricing interpretation and the asymmetry in ease of buying versus shorting. A three-factor model with a single mispricing factor also performs well, especially in Bayesian model comparisons. |
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| ISSN: | 0893-9454 1465-7368 |
| DOI: | 10.1093/rfs/hhw107 |