Do Five Asset Pricing Anomalies Share a Common Mispricing Factor? Multifaceted Empirical Analyses of Failure Risk Proxies, External Financing, and Stock Returns

58 Pages Posted: 8 Mar 2010

See all articles by Joseph P. Ogden

Joseph P. Ogden

State University of New York (SUNY) at Buffalo - School of Management

Julie Fitzpatrick

affiliation not provided to SSRN

Date Written: March 7, 2010

Abstract

Assuming that risk premiums are determined by failure risk, we present a stylized model of interactions among risk-proxy variables, external financing, and stock returns in which a common mispricing factor, involving operating profit and external financing, drives the following five asset pricing anomalies: (1) the failure-risk anomaly; (2) earnings momentum; (3) the external financing anomaly; (4) the accruals anomaly; and (5) the book-to-market anomaly. We test the model using panel data on 205 portfolios of U.S. firms (1974-2008). Results for several methodologies all indicate that stock returns are driven by one rational factor, firm size, and one mispricing factor common to anomalies (1), (2), (3), (5) and, to a lesser extent, (4). The common mispricing factor fades with futurity and has strong seasonality.

Keywords: Asset Pricing, Failure Risk, Anomalies, Risk Proxies, External Financing, Accruals, Seasonality

JEL Classification: G12, G14

Suggested Citation

Ogden, Joseph P. and Fitzpatrick, Julie, Do Five Asset Pricing Anomalies Share a Common Mispricing Factor? Multifaceted Empirical Analyses of Failure Risk Proxies, External Financing, and Stock Returns (March 7, 2010). Available at SSRN: https://ssrn.com/abstract=1566223 or http://dx.doi.org/10.2139/ssrn.1566223

Joseph P. Ogden (Contact Author)

State University of New York (SUNY) at Buffalo - School of Management ( email )

Jacobs Management Center
Buffalo, NY 14222
United States
716-645-3270 (Phone)
716-645-3823 (Fax)

Julie Fitzpatrick

affiliation not provided to SSRN ( email )

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