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The Fed and Stock Market Anomalies

Paulo F. Maio

Hanken School of Economics

Pedro Santa-Clara

New University of Lisbon - Nova School of Business and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

October 8, 2013

We present a simple three-factor asset pricing model that helps explain several CAPM anomalies -- value premium, long-term reversal in returns, corporate investment, price momentum, and earnings momentum. The two key risk factors in the model are related with the same state variable -- the Fed funds rate. The model explains a large percentage of the dispersion in average returns associated with each anomaly, with cross-sectional R^2 estimates between 46% and 91%. Moreover, the model compares favorably with alternative multifactor models in pricing the joint five CAPM anomalies. Hence, monetary policy actions seem to be relevant for explaining cross-sectional equity risk premia.

Number of Pages in PDF File: 78

Keywords: Cross-section of stock returns; Asset pricing; Intertemporal CAPM; Conditional CAPM; Conditioning information; State variables; Linear multifactor models; Predictability of returns; Fama-French factors; Value premium; Momentum; Long-term reversal in returns; corporate investment anomaly; earnings

JEL Classification: E44, G12, G14

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Date posted: January 17, 2012 ; Last revised: October 9, 2013

Suggested Citation

Maio, Paulo F. and Santa-Clara, Pedro, The Fed and Stock Market Anomalies (October 8, 2013). Available at SSRN: http://ssrn.com/abstract=1986787 or http://dx.doi.org/10.2139/ssrn.1986787

Contact Information

Paulo F. Maio (Contact Author)
Hanken School of Economics ( email )
Pedro Santa-Clara
New University of Lisbon - Nova School of Business and Economics ( email )
HOME PAGE: http://docentes.fe.unl.pt/~psc/
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
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